Reference no: EM132919165
Brian Investment Service Brian Givens is a financial analyst specialising in making recommendations to investors who have recently come into unforeseen sums of money from lottery winning, inheritances, and the like. He discusses investment goals with investors, accounting for each investor's attitude toward risk and liquidity. After an initial consultation with a client, Brian selects a group of bonds, stocks, savings plans, mutual funds, and other investments that he feels may be suitable for consideration in the portfolio. He then secures information on each investment and determines his rating. With this information, he develops a chart giving the risk factors (numbers between 0 and 100, based on his evaluation), expected returns based on current and projected company operations, and liquidity information. At the second meeting, Brian defines the client's goals more precisely. The responses are entered into a linear programming model, and a recommendation is made to the client based on the model results. Sally Merrit has just inherited $100,000. Based on their initial meeting, has found Sally to be quite risk-averse. Thus, Brian suggests the following potential investments that can offer good returns with negligible risk.
Potential Investment Expected Return Brian's Rating Liquidity Analysis Risk Factor
Current account 4.0% A Immediate 0
Fixed deposit 5.2% A 5-year 0
Tesco 7.1% B+ Immediate 25
Sunway group 10.0% B Immediate 30
Insurance annuity 8.2% A 1-year 20
Mining bond 6.5% B+ 1-year 15
Microcomp Systems 20.0% A Immediate 65
Berjaya Hotels 12.5% C Immediate 40
Based on their second meeting, Brian has been able to help Sally develop the following portfolio goals.
1. An expected annual return of at least 7.5%
2. At least 50% of the inheritance in A-rated investments
3. At least 40% of the inheritance in immediately liquid investments
4. No more than $30,000 in savings accounts and certificates of deposit
Given that Sally is risk-averse, Brian would like to make a final recommendation to minimise total risk while meeting the goals mentioned above. As a part of his service, Brian would like to inform Sally of potential what-if scenarios associated with this recommendation.
(a) Provide a brief specification for your model. It should include an introduction, assumptions, decision variables, objective function, and constraints. [2 marks]
(b) Implement your model in an Excel spreadsheet and find the optimal solutions.
(c) Discuss the practical implications of reduced cost.
(d) What is the range of optimality that the risk factors can change without altering Brian's recommendation?
(e) Discuss the shadow prices for each investment option.