A Financial Advisor Is About to Build an Investment Portfolio

question 93

Essay

A financial advisor is about to build an investment portfolio for a client who has $100,000 to invest. The four investments available are A, B, C, and D. Investment A will earn 4% and has a risk of two "points" per $1,000 invested. B earns 6% with 3 risk points; C earns 9% with 7 risk points; and D earns 11% with a risk of 8. The client has put the following conditions on the investments: A is to be no more than one-half of the total invested. A cannot be less than 20% of the total investment. D cannot be less than C. Total risk points must be at or below 1,000.Identify the decision variables of this problem. Write out the objective function and constraints. Do not solve.

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Definitions:

Return on Equity

A measure of a corporation's profitability that reveals how much profit a company generates with the money shareholders have invested.

Earnings per Share

A financial metric calculated by dividing a company's net income by the number of outstanding shares, indicating how much profit a company makes per share of stock.

Fixed Cost Sources

Expenses that do not change with the level of production or sales, such as rent, salaries, and insurance premiums.

Financial Risk

The chance of incurring financial losses from an investment or business activity.