Table 8-7
Ivana Myrocle wishes to invest her inheritance of $200,000 so that her return on investment is maximized,but she also wishes to keep her risk level relatively low.She has decided to invest her money in any of three possible ways: CDs,which pay a guaranteed 6 percent;stocks,which have an expected return of 13 percent;and a money market mutual fund,which is expected to return 8 percent.She has decided that any or all of the $200,000 may be invested,but any part (or all)of it may be put in any of the 3 alternatives.Thus,she may have some money invested in all three alternatives.In formulating this as a linear programming problem,define the variables as follows:
C = dollars invested in CDs
S = dollars invested in stocks
M = dollars invested in the money market mutual fund
-According to Table 8-7,which describes an investment problem,suppose that Ivana has assigned the following risk factors to each investment instrument - CDs (C): 1.2;stocks (S): 4.8;money market mutual fund (M): 3.2.If Ivana decides that she wants the risk factor for the whole investment to be less than 3.3,how should the necessary constraint be written?
A)1.2C + 4.8S + 3.2M ≤ 3.3
B)C + S + M ≤ 3.3
C)1.2C + 4.8S + 3.2M ≤ 3.3(C + S + M)
D)(1.2C + 4.8S + 3.2M)/3 ≤ 3.3
E)S = 0

Question

Quizplus · Accepted Answer

The risk factor for the whole investment can be found by taking a weighted average of the risk factors for each investment instrument. The weights are the proportions of the total investment placed in each instrument. Therefore, the constraint can be written as:

1.2C + 4.8S + 3.2M ≤ 3.3(C + S + M)

This ensures that the weighted average risk factor is less than 3.3. Choice A is incorrect because it does not include the weights for each investment. Choice B is incorrect because it does not consider the risk factors at all. Choice D is incorrect because it does not take into account the proportions invested in each instrument. Choice E is not a valid option because it does not account for Ivana's desire for a high return on investment.

Table 8-7 Ivana Myrocle Wishes to Invest Her Inheritance of $200,000 So