PORTFOLIO MIX PROBLEM

Problem 1.67

The Agro Promotion Bank is trying to select investment portfolio for a cotton farmer. The Bank has chosen a set of five investment alternatives, with subjective estimates of rates return and risk, as follows:

 

Investment Annual Rate of Return Risk
Tax-free municipal bonds 6.0 1.3
Corporate bonds 8.0 1.5
High grade common stock 5.0 1.9
Mutual fund 7.0 1.7
Real estate 15.0 2.7

 

The bank officer in charge of the portfolio would like to maximise the average annual rate of return on the portfolio. However, the wealthy investor has specified that the average risk of the portfolio should not exceed 2.0; and does not want more than 20% of the investment to be put into real estate. Formulate an LP ...

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