# Question: LP models are used by many Wall Street firms to

LP models are used by many Wall Street firms to select a desirable bond portfolio. The following is a simplified version of such a model. A company is considering investing in four bonds; $1 million is available for investment. The expected annual return, the worst-case annual return on each bond, and the duration of each bond are given in the file S14_83.xlsx.

The company wants to maximize the expected return from its bond investments, subject to three constraints:

• The worst-case return of the bond portfolio must be at least 8%.

• The average duration of the portfolio must be at most 6. For example, a portfolio that invests $600,000 in bond 1 and $400,000 in bond 4 has an average duration of [600,000(3) + 400,000(9)]/1,000,000 = 5.4

• Because of diversification requirements, at most 40% of the total amount invested can be invested in a single bond. Determine how the company can maximize the expected return on its investment.

The company wants to maximize the expected return from its bond investments, subject to three constraints:

• The worst-case return of the bond portfolio must be at least 8%.

• The average duration of the portfolio must be at most 6. For example, a portfolio that invests $600,000 in bond 1 and $400,000 in bond 4 has an average duration of [600,000(3) + 400,000(9)]/1,000,000 = 5.4

• Because of diversification requirements, at most 40% of the total amount invested can be invested in a single bond. Determine how the company can maximize the expected return on its investment.

**View Solution:**## Answer to relevant Questions

At the beginning of year 1, you have $10,000. Investments A and B are available; their cash flows are shown in the file S14_84.xlsx. Assume that any money not invested in A or B earns interest at an annual rate of 8%.a. ...Based on Bean et al. (1987). Boris Milkem’s firm owns six assets. The expected selling price (in millions of dollars) for each asset is given in the file S14_89.xlsx. For example, if asset 1 is sold in year 2, the firm ...Broker Sonya Wong is currently trying to maximize her profit in the bond market. Four bonds are available for purchase and sale at the bid and ask prices shown in the file S14_96.xlsx. Sonya can buy up to 1000 units of each ...It is currently the beginning of 2010. A city (labeled C for convenience) is trying to sell municipal bonds to support improvements in recreational facilities and highways. The face values (in thousands of dollars) of the ...Use @RISK to draw a triangular distribution with parameters 200, 300, and 600. Then superimpose a normal distribution on this drawing, choosing the mean and standard deviation to match those from the triangular distribution. ...Post your question