A company is considering investing a total amount of $2.50 million in four bonds. The expected annual return, the worst-case annual return on each bond, and the "duration" of each bond are given in the table below. The duration of a bond is a measure of the bond's sensitively to interest rates. The company wants to maximize the expected return from its bond investments, subject to the following constraints:
∙ The worst-case return of the bond portfolio must be at least 90%.
∙ The average duration of the portfolio must be at most 7.
∙ Because of diversification requirements, at most 35% of the total amount invested in a single bond.
Determine how the company can maximize the expected return on its investment.

Question

A company is considering investing a total amount of $2.50 million in four bonds. The expected annual return, the worst-case annual return on each bond, and the "duration" of each bond are given in the table below.  The duration of a bond is a measure of the bond's sensitively to interest rates. The company wants to maximize the expected return from its bond investments, subject to the following constraints:
∙ The worst-case return of the bond portfolio must be at least 90%.
∙ The average duration of the portfolio must be at most 7.
∙ Because of diversification requirements, at most 35% of the total amount invested in a single bond.
Determine how the company can maximize the expected return on its investment.

Quizplus · Accepted Answer

The Answer of A company is considering investing a total amount of $2.50 million in four bonds. The expected annual return, the worst-case annual return on each bond, and the "duration" of each bond are given in the table below.  The duration of a bond is a measure of the bond's sensitively to interest rates. The company wants to maximize the expected return from its bond investments, subject to the following constraints:
∙ The worst-case return of the bond portfolio must be at least 90%.
∙ The average duration of the portfolio must be at most 7.
∙ Because of diversification requirements, at most 35% of the total amount invested in a single bond.
Determine how the company can maximize the expected return on its investment.

A Company Is Considering Investing a Total Amount of $2