Investment Strategy at T.
is an investment advisory firm that manages more than $120 million in funds
for its numerous clients.
The company uses an asset allocation model that recommends the
portion of each client’s portfolio to be invested in a growth stock fund, an income fund, and a
money market fund.
To maintain diversity in each client’s portfolio, the firm places limits on the
percentage of each portfolio that may be invested in each of the three funds.
guidelines indicate that the amount invested in the growth fund must be between 20 and 40
percent of the total portfolio value.
Similar percentages for the other two funds stipulate that
between 20 and 50 percent of the total portfolio value must be in the income fund and that at
least 30 percent of the total portfolio value must be in the money market fund.
In addition, the company attempts to assess the risk tolerance of each client and adjust the
portfolio to meet the needs of the individual investor.
For example, Anderson just contracted
with a new client who has $800,000 to invest.
Based on an evaluation of the client’s risk
tolerance, Anderson assigned a maximum risk index of 0.
05 for the client.
The firm’s risk
indicators show the risk of the growth fund at 0.
10, the income fund at 0.
07, and the
money market fund at 0.
An overall portfolio risk index is computed as a weighted average
of the risk rating for the three funds, where the weights are the fraction of the client’s portfolio
invested in each of the funds.
Additionally, Anderson is currently forecasting annual yields of 18 percent for the growth fund,
5 percent for the income fund, and 7.
5 percent for the money market fund.
Based on the
information provided, how should the new client be advised to allocate the $800,000 among
the growth, income, and money market funds? Develop a linear programming model that will
provide the maximum yield for the portfolio.
Use your model to develop a managerial report.
Recommend how much of the $800,000 should be invested in each of the three funds.
What is the annual yield you anticipate for the investment recommendation?
Assume that the client’s risk index could be increased to 0.
How much would the
yield increase, and how would the investment recommendation change?
Refer again to the original situation where the client’s risk index was assessed to be
How would your investment recommendation change if the annual yield for the
growth fund were revised downward to 16 percent or even to 14 percent?
Assume that the client expressed some concern about having too much money in the
How would the original recommendation change if the amount invested in
the growth fund is not allowed to exceed the amount invested in the income fund?
The asset allocation model you developed may be useful in modifying the portfolios for
all of the firm’s clients whenever the anticipated yields for the three funds are
What is your recommendation as to whether use of this model is