An Investor Has $80,000 to Invest in Three Stocks, Stock

question 95

Short Answer

An investor has $80,000 to invest in three stocks, stock A costs $100, stock B costs $120 and stock C costs $80. Each stock A has a risk factor of 8, each stock B has a risk factor of 10 and each stock C has a risk factor of 7. The investor believes that the sum of the risk factors for all stocks purchase should not exceed 6000. The projected annual growth rate for the three stocks are 9%, 13% and 8% respectively. The projected annual dividend income from these stocks are as follows: Stock A: $14/stock, Stock B: $15/stock, and Stock C: $20/stock. The investor desires an annual dividend income of $10,000. The investor has established the following goals in order of their importance:

(1) The investor believes that the budget cannot be exceeded. (d₁)
(2) The risk factor should not exceed the target amount of 6000. (d₂)
(3) The average annual growth rate in stock prices must be at least 10%. (d₃)
(4) The investor desires a dividend income of at least $10,000. (d₄)

-Write the budget constraint

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