Problem:
A winner of the Texas Lotto has decided to invest $50,000 per year in the stock market. Under consideration are stocks for a petrochemical firm and a public utility. Although a long-range goal is to get the highest possible return, come consideration is given to the risk involved with the stocks. A risk index on a scale of 1 to 10 (with 10 being the most risky) is assigned to each of the 2 stocks. The total risk of the portfolio is found by multiplying the risk of each stock by the dollars invested in each stock.
The following table provides a summary of the return and risk:
|
Stock
|
Estimated Return
|
Risk index
|
|
Petrochemical
|
12%
|
9
|
|
Utility
|
6%
|
4
|
The investor would like to maximize the return on the investment, but the average risk index of the investment should not be higher than 6.
Q1. How much should be invested in each stock?
Q2. What is the average risk for the investment?
Q3. What is the estimated return for this investment?