Chapter: Linear Programming (LP)

Question 2 - Investment decision problem

The Heinlein and Krampf Brokerage firm has just been instructed by one of its clients to invest $250,000 of her money obtained recently through the sale of land holdings in Ohio. The client has a good deal of trust in the investment house, but she also has her own ideas about the distribution of the funds being invested. In particular, she requests that the firm select whatever stocks and bonds they believe are well rated, but within the following guidelines:

(i) Municipal bonds should constitute at least 20% of the investment.

(ii) At least 40% of the funds should be placed in a combination of electronic firms, aerospace firms, and drug manufacturers.

(iii) No more than 50% of the amount invested in municipal bonds should be placed in a high-risk, high-yield nursing home stock.

Subject to these restraints, the client's goal is to maximize projected return on investments. The analysts at Heinlein and Krampf, aware of these guidelines, shows a list of high-quality stocks and bonds and their corresponding rates of return:

Investment	Projected Rate of Return (%)
Los Angeles Municipal Bonds	5.3
Thompson Electronics, Inc.	6.8
United Aerospace Corp.	4.9
Palmer Drugs	8.4
Happy Days Nursing Homes	11.8

(a) Formulate this portfolio selection problem using Linear Programming. (Objective function and constraints must be clearly shown)

(b) Solve this problem using Excel solver. Based on your findings, what would you suggest to the client?

(c) If the projected rate of return of "Happy Days Nursing Homes" drops to 6.0% next year, would you suggest the client to invest in it? Please explain your new findings using Excel solver.

Note:

Hello! If you are not sure how to fulfill all the requirements needed, please do not attempt the question.

Microsoft excel and excel solver are needed to solve these questions.

Please send me the answers in an excel file if possible.

Your help is very much appreciated. Thank you.