Diversified portfolio through commercial lender

Assignment Help Financial Management

Reference no: EM131458184

An investor wishes to invest all of her $13.5 million in a diversified portfolio through a commercial lender. The types of investments, the expected annual interest rate for the investment, and the maximum allowed percentage of the total portfolio that the investment can represent are shown in the table below:

INVESTMENT EXPECTED INTEREST MAXIMUM ALLOWED

(% of total portfolio)

Low-income mortgage loans 7.20% 15%

Conventional mortgage loans 6.00% 30%

Government sponsored mortgage loans 8.00% 20%

Bond investments 5.45% 15%

Stock investments 8.90% 20%

Futures trading 9.80% 15%

She wants at least 30% of her total investment in non-mortgage instruments. Furthermore, she wants no more than 45% of her total investment to be in high-yield and high risk instruments (i.e. expected interest rate of investment is 8% or greater). Formulate and solve this problem in Excel to determine how her money should be diversified in a manner which will meet the requirements and maximize the amount of interest income. (Hint: Make sure that the LHS and RHS of constraints are the same units)

a) What is the expected total interest income generated from the investment strategy (the value of the objective function)?

b) Based on your solution, how much should be invested in government sponsored mortgage loans?

c) Based on your solution, how much should be invested in stock investments?

d) If you could increase the maximum allowed for the investments (in order to increase overall return) - which would you choose: conventional mortgage loans, bond investments, or governmental sponsored mortgage loans.

e) If the return on low-income mortgage loans was reduced to 5%, how much should be invested in these low-income mortgage loans based on your new solution?

Reference no: EM131458184

Questions Cloud

Which pays an annual effective interest rate : A deposit of X is made into a fund which pays an annual effective interest rate of 6% for 10 years.

The after-tax salvage cash flow : Could Someone explain how to calculate the following? A project’s Time 0 cash flow-The after-tax salvage cash flow

What is delta hedging : What is gamma hedging? Under what conditions do you need gamma hedging on top of delta hedging?

Find out more about content management systems : Using the Internet, find out more about content management systems (CMSs). What primary purposes do they serve?

Diversified portfolio through commercial lender : Investor wishes to invest all of her $13.5 million in diversified portfolio through commercial lender. What is the expected total interest income generated

Indicate the key issues currently facing the nation : Discussions will focus on three perspectives: Analysis of economic issues of importance to a particular country. Indicate the key issue currently facing nation.

Determine the price of a put option : Verify whether the options prices obtained in this and the previous question satisfy put-call parity.

How are price guidelines set : How are price guidelines set? What strategic choices in the marketing plan play a pivotal role in price strategy?

Evaluating project that is expected to produce cash flows : The IRR of this 6-year Project is 9.75 percent. if the firms cost of capital is 8%, what is the projects NPV?

User Account

All Pages