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:

Refurbishing Materials

Materials used in the process of cleaning, repairing, and updating an item to bring it back to a like-new condition, often in electronics and furniture.

Containers Refurbished

Involves repairing, cleaning, and updating used containers to extend their useful life or repurpose them for other uses.

Spending Variance

The difference between the actual cost incurred for an item and its planned or budgeted cost, indicating how well a company manages its expenses.

Budgeting

The method of crafting a budget that details your planned income and expenditures for a certain time frame.