Question 4, Sensitivity Analysis (15 marks) Kathleen Allen has up to $70,000 to divide among several...

 

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Question 4, Sensitivity Analysis (15 marks) Kathleen Allen has up to $70,000 to divide among several investments. The alternative investments are municipal bonds (MB) with an 8.5% annual return, certificates of deposits (CD) with a 5% return, treasury bills (TB) with a 6.5% return and a growth stock (GS) fund with a 13% annual return. The investments are all evaluated after one year. However, each investment has a different perceived risk to the investor; thus, it is advisable to diversify and maybe leave some amount un-invested. Kathleen wants to know how much to invest in each alternative in order to maximize return. The following guidelines for diversification have been established so that the risk is minimized. No more than 20% of total amount available should be in municipal bonds. The amount invested in certificates of deposit should not exceed the amount invested in the other 3 alternatives. At least 30% of the available amount for investment should be in treasury bills and certificates of deposit. To be safe, more should be invested in CDs and treasury bills than in municipal bonds and growth stock fund by a ratio of at least 1.2 to 1. The following table is the sensitivity report for this problem. Adjustable Cells. Nome $B$11 $ amount in MB $C$11 $ amount in CD $D$11 $ amount. in TB $E$11 $ amount in GS Constraints. Nome $B$18 Fund LHS $B$ 19 MB LHS $B$20 CD & others LHS $B$21 CD & TB LHS $B$22 Ratio LHS Find Val ue ? 0 38181. 82 31818. 18 Find Val ue Reduced Cost -0.045 -70000 38181. 82 ? ? 0 Shadow Price ?0. 094545 ? 0 ? ? ? -0. 02955 Objective Coeffi di ent 0.085 0.05 0. 13 Constraint R. H. Si de 70000 14000 0 21000 Allowable I nor eas e ? 0.015 0. 065 1E+30 Allowable I nor eas e 1E+30 ? 2 ? 70000 Allowable Decr eos e 1E+30 0.015 Allowable Decr eas e 31500 14000 ? ? 37800 f) Final value of FUND (constraint). (1 marks) g) Final value of MB (constraint). (1 marks) h) Allowable Increase of MB (constraint). (1 marks) k) Shadow Price of CD& others (constraint). (1 marks) i) Allowable Increase of CD& others (constraint). (1 marks) j) Allowable Decrease of CD& others (constraint). (1 marks) k) Shadow price of CD& TB (constraint). (1 marks) 1) Allowable Increase of CD& TB (constraint). (1 marks) m) Allowable Decrease of CD& TB (constraint). (1 marks) n) Final value of Ratio (constraint). (1 marks) Question 4, Sensitivity Analysis (15 marks) Kathleen Allen has up to $70,000 to divide among several investments. The alternative investments are municipal bonds (MB) with an 8.5% annual return, certificates of deposits (CD) with a 5% return, treasury bills (TB) with a 6.5% return and a growth stock (GS) fund with a 13% annual return. The investments are all evaluated after one year. However, each investment has a different perceived risk to the investor; thus, it is advisable to diversify and maybe leave some amount un-invested. Kathleen wants to know how much to invest in each alternative in order to maximize return. The following guidelines for diversification have been established so that the risk is minimized. No more than 20% of total amount available should be in municipal bonds. The amount invested in certificates of deposit should not exceed the amount invested in the other 3 alternatives. At least 30% of the available amount for investment should be in treasury bills and certificates of deposit. To be safe, more should be invested in CDs and treasury bills than in municipal bonds and growth stock fund by a ratio of at least 1.2 to 1. The following table is the sensitivity report for this problem. Adjustable Cells. Nome $B$11 $ amount in MB $C$11 $ amount in CD $D$11 $ amount. in TB $E$11 $ amount in GS Constraints. Nome $B$18 Fund LHS $B$ 19 MB LHS $B$20 CD & others LHS $B$21 CD & TB LHS $B$22 Ratio LHS Find Val ue ? 0 38181. 82 31818. 18 Find Val ue Reduced Cost -0.045 -70000 38181. 82 ? ? 0 Shadow Price ?0. 094545 ? 0 ? ? ? -0. 02955 Objective Coeffi di ent 0.085 0.05 0. 13 Constraint R. H. Si de 70000 14000 0 21000 Allowable I nor eas e ? 0.015 0. 065 1E+30 Allowable I nor eas e 1E+30 ? 2 ? 70000 Allowable Decr eos e 1E+30 0.015 Allowable Decr eas e 31500 14000 ? ? 37800 f) Final value of FUND (constraint). (1 marks) g) Final value of MB (constraint). (1 marks) h) Allowable Increase of MB (constraint). (1 marks) k) Shadow Price of CD& others (constraint). (1 marks) i) Allowable Increase of CD& others (constraint). (1 marks) j) Allowable Decrease of CD& others (constraint). (1 marks) k) Shadow price of CD& TB (constraint). (1 marks) 1) Allowable Increase of CD& TB (constraint). (1 marks) m) Allowable Decrease of CD& TB (constraint). (1 marks) n) Final value of Ratio (constraint). (1 marks)

Answer rating: 100% (QA)

Decision Variables Four decision variables represent the monetary amount invested in each investment alternative x 1 amount invested in municipal bonds x 2 amount invested in certificates of deposit x ... View the full answer