A trust fund manager needs to determine how to invest $200,000 in the following collection of bonds to maximize the pre-tax annual return. 

Bond	Annual Return	Maturity	Risk	Tax-Free
A	9.5%	Long	High	Yes
B	8.0%	Short	Low	Yes
C	9.0%	Long	Low	No
D	9.0%	Long	High	Yes
E	9.0%	Short	High	No

The officer wants to invest at least 50% of the money in short-term issues and at least 50% low-risk issues. No more than 30% of the funds should go in taxable investments.

(1.1) Let

A = amount to invest in bond A

B = amount to invest in bond B

C = amount to invest in bond C

D = amount to invest in bond D

E = amount to invest in bond E

Formulate a linear programming model for this problem

 What is the feasible solution? What is the optimal solution? How much annual return would Bond D have to generate before we consider investing in it? Why? Explain your answer succinctly:  If we require $20,000 more to be invested in short-term bonds, will the annual return increase or decrease (circle one)? By how much?   If we allow $20,000 more to be invested in high-risk bonds, will the annual return increase or decrease (circle one)? By how much?  Explain the meaning of the shadow price for the total investment.   Suppose the fund manager decides that at least 40% of the total annual return should be from tax-free investments as well. How would you modify the model? 

Answer rating: 100% (QA)

The problem can be formulated as a linear programming model ... View the full answer