Innis Investments manages funds for a number of companies and wealthy clients. The investment

strategy is tailored to each clients needs. For a new client, Innis has been authorized

to invest up to $1.2 million in two investment funds: a stock fund and a money

market fund. Each unit of the stock fund costs $50 and provides an annual rate of return of

10%; each unit of the money market fund costs $100 and provides an annual rate of return

of 4%.

The client wants to minimize risk subject to the requirement that the annual income

from the investment be at least $60,000. According to Inniss risk measurement system,

each unit invested in the stock fund has a risk index of 8, and each unit invested in the

money market fund has a risk index of 3; the higher risk index associated with the stock

fund simply indicates that it is the riskier investment. Inniss client also specified that at

least $300,000 be invested in the money market fund.

a. Determine how many units of each fund Innis should purchase for the client to minimize

the total risk index for the portfolio.

b. How much annual income will this investment strategy generate?

c. Suppose the client desires to maximize annual return. How should the funds be

invested?