What is the total risk and total return, Financial Accounting

Financials Investments, a group of financial advisors and retirement planners, has been requested to provide advice on how to invest $200,000 for one of its clients. The client has stipulated that the money must be put into either stocks fund or a money market fund, and the annual return should be at least $14,000. Other conditions related to risk have also been specified, and the following linear program was developed to help with this investment decision:

Minimize Risk = 12S + 5M

Subject to:

                             S + M = 200,000 (total invest is $200,000)

               0.10S + 0.05M ≥ 14,000 (return must be at least $14,000)

                                    M ≥ 40,000 (at least $40,000 must be in money market)

                                 S, M ≥0


S = dollars invested in stock fund

M = dollars invested in money market fund

1) Solve this problem graphically (As done in the class).

2) Then set it up in Excel and solve it.

3) Email the excel model which has the sum product formula to the instructor.

a)       How much money should be invested in stock fund and in money market fund?

b)       What is the Total Risk?

c)       What is the total return? What rate of return is this?

d)      Would solution change if risk measure for each dollar in the stock fund were 14 instead of 12?

e)       For each additional dollar that is available, how much does the risk change?

f)        Would solution change if the amount that must be invested in the money market fund were changed from $40,000 to $50,000?

Posted Date: 3/29/2013 2:34:40 AM | Location : United States

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