A Company Is Considering Investing a Total Amount of $2

question 14

Essay

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.

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Definitions:

Clustering

A process in data analysis where a set of objects are grouped together so that objects in the same group are more similar to each other than to those in other groups.

Focused Freewriting

A writing strategy involving continuous, nonstop writing for a set period of time, concentrating on a specific topic or question.

Brainstorming

A technique for fostering collective creativity, where the aim is to resolve a particular issue by compiling ideas that spontaneously arise from the contributions of group participants.

Clustering

A method used to organize ideas or information into groups based on common characteristics, often used in brainstorming and problem-solving processes.