Question
The Portfolio Manager of MaxWorth Investment Inc. has been asked to invest $2,000,000 of a large pension fund. The Investment Research Department has identified six
The Portfolio Manager of MaxWorth Investment Inc. has been asked to invest $2,000,000 of a large pension fund. The Investment Research Department has identified six mutual funds with varying investment strategies, resulting in different potential returns and associated risks, as summarized in Table below. Table: Risk and Expected Rate of Return for Six Mutual Funds Fund 1 2 3 4 5 6 Price ($/Share) 55 68 115 18 26 20 Expected return (%) 30 22 15 12 10 8 Risk category High High High Medium Medium Low One way to control the risk to limit the amount of money invested in the various funds. To that end, the management of MaxWorth Investment Inc. has specified the following guidelines: The total amount invested in high-risk funds must be between 50 and 70% of the portfolio. The total amount invested in medium-risk funds must be between 20 and 35% of the portfolio. The total amount invested in low-risk funds must be at least 5% of the portfolio. A second to control risk is to diversify-that is, to spread the risk by investing in many different alternatives. The management of MaxWorth Investment Inc. has specified that the amount invested in the high risk Funds 1, 2, and 3 should be in the ratio 1:2:3 respectively. The amount invested in the medium-risk funds 4 and 5 should be 2:1. With these guidelines, what portfolio should you, the Portfolio Manager, recommend so as to maximize the expected rate of return? Provide LP formulation & solve the problem using Excel Solver.
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