Exercise 4 (Investment portfolio)
George Johnson would like to set up a trust fund for his two children. The trust fund has two investment options: 1. a bond fund and 2. a stock fund. The projected returns over the life of the investments are 6% for the bond fund and 10% for the stock fund. To reduce the risk resulted from market volatility, he wants to invest at least 30% of the entire amount of trust fund in the bond fund. In addition, he wants to select a portfolio that will enable him to obtain a total return of at least 7.5%.
A. Formulate a linear program that can be used to determine the percentage allocation to the bond fund and stock fund. The objective of the problem is to maximize the expected total portfolio return.
B. Solve the problem using the graphical solution procedure. Find out the optimal percentage allocations and the optimal total portfolio return.