User Account

All Pages

What is the marginal rate of return

Assignment Help Financial Management
Reference no: EM131919242

A portfolio manager has developed a list of six investment alternatives for a multiyear horizon. These are Treasury bills, Common stock, Corporate bonds, Real estate, Growth funds, and Savings and loans. These investments and their various financial factors are described below.

In the table, the return is given as an annual percentage, and the length represents the estimated number of years required for the annual return to be realized.

The risk coefficient is a subjective estimate representing the manager's appraisal of the relative safety of each alternative, on a scale of 1-10. The growth potential is an estimate of the potential increase in value over the horizon.

 

 

 

Portfolio Data

 

 

Alternative

TB

CS

CB

RE

GF

SL

Length (years)

4

7

8

6

10

5

Annual return (%)

6

15

12

24

18

9

Risk coefficient

1

5

4

8

6

3

Growth potential (%)

0

18

10

32

20

7

The manager wishes to maximize the return on a $3 million portfolio, subject to the following restrictions:

1. The weighted average length should not exceed 7 years.

2. The weighted average risk coefficient should not exceed five.

3. The weighted average growth potential should be at least 10%.

4. The investment in real estate should be no more than twice the investment in stocks and bonds (i.e., in CS, CB, and GF) combined.

a) Formulate a linear mathematical model to achieve the manager's objective. Clearly define your decision variables, objective and constraints

b) Implement your model using Excel and find the optimal return and the optimal allocation of investment funds? (Give the optimal return in dollars and also as a percentage.). Include in your report a snapshot of the solution

c) What is the marginal rate of return? In other words, what would be the return on the next dollar invested if there were one more dollar in the portfolio?

d) For additional investment beyond the original $3 million, how does the optimal allocation change?

Reference no: EM131919242

Questions Cloud

What operational activities determine these characteristics : Select two products that you have recently purchased; one should be a service and the other a manufactured good. Think about the process that you used.
What is the minimum amount the selling firm must receive : Which firm(s) will buy emissions permits? How many will they buy and from whom? What is the minimum amount the selling firm must receive to break even?
Prepare a schedule computing the threshold for asset : Prepare a schedule computing the threshold for asset amounts that should be used to determine which funds must be reported as major
What is the value of safeco stock : Analysts believe that Safeco will hit their price target of $92.50 in three years. What is the value of Safeco stock if your required return is 10.25 percent?
What is the marginal rate of return : Formulate a linear mathematical model to achieve the manager's objective. Clearly define your decision variables, objective and constraints.
What is wesley realized gain on the sale : Wesley had purchased the property for $15,000 and had invested an additional $6,000 in it. What is Wesley's realized gain on the sale
What is the yield you could expect on bond : If coupon payments are semiannual, and the bond is currently selling for $1,125, what is the yield you could expect on this bond if you held it until it matures
What is the socially optimal level of water skiing : Calculate the loss of surplus if there is no government intervention in this market. What is the socially optimal level of water skiing?
Prepare december adjusting entry to recognize gross profit : Cost of goods sold 88,560 103,680. Prepare the December 31, 2010 adjusting entry to recognize the gross profit realized on installment sales

Reviews

Write a Review

Financial Management Questions & Answers

  Bottleneck operation by adding new equipment

Markland Manufacturing intends to increase capacity by overcoming a bottleneck operation by adding new equipment.

  Inventory Systems

Mitsi Inventory Systems, Inc., has announced a rights offer. The company has announced that it will take five rights to buy a new share in the offering at a subscription price of $25. What price should the stock sell for ex-rights? What is the amount..

  Snowboarding accident that broke both his legs and arm

John Chang was seriously injured in a snowboarding accident that broke both his legs and an arm.

  The parties in the customary way unless otherwise noted

The various closing costs will be allocated between the parties in the customary way unless otherwise noted.

  Planning for savings program

A father is now planning a savings program to put his daughter through college. She is 13, plans to enroll at the university in 5 years,

  What is your incremental cash flow from selling the machine

You purchased a machine for $1.1 million three years ago and have been applying straight-line depreciation to zero for a seven-year life. Your tax rate is 38%. If you sell the machine today (after three years of depreciation) for $700,000, what is yo..

  Economy suffered a significant decline just year prior

Because the economy suffered a significant decline just a year prior, there was uncertainty about the economy in general, and, very much affected by the economy, the demand for shipping and containers. Since he has not dealt with uncertainty regardin..

  What types of firms are most exposed to these indirect costs

Studies indicate that the direct cost of bankruptcy is small. What are the direct costs? What are the indirect costs of bankruptcy? What types of firms are most exposed to these indirect costs?

  Calculate the standard deviation of portfolio

You are given the year-on-year expected return on two stocks, TechCo and RetailCo, which are 4.2% and 1.8% respectively and their corresponding annualized standard deviations are 12.5% and 15%. Calculate the standard deviation of Tim’s portfolio.

  What would the value today be if payments occurred forever

An investment offers $7,000 per year for 15 years, What would the value today be if the payments occurred forever?

  What is the minimum number of shares

The shareholders of the Pickwick Company need to elect five directors. There are 360,000 shares outstanding. what is the minimum number of shares you need to own to ensure that you can elect at least one director if the company has majority voting?

  Injection-molding machine to expand its production capacity

Larson Manufacturing is considering purchasing a new injection-molding machine to expand its production capacity. There is a one-time cost of $30,000 to perform site preparation for the machine, which will occur immediately. What would be the maximum..

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +1-415-670-9521

Phone: +1-415-670-9521

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd