Reference no: EM132288233
Question (1)
Stock Company is considering 6 investments. The cash required from each investment as well as the NPV of the investment is given next. The cash available for the total investments is $14,000. Stock.co wants to maximize its NPV.
Data for the Stock Company Problem
|
Investment
|
1
|
2
|
3
|
4
|
5
|
6
|
|
Cash Required
(1000s)
|
$5
|
$7
|
$4
|
$3
|
$4
|
$6
|
|
NPV added
(1000s)
|
$16
|
$22
|
$12
|
$8
|
$11
|
$19
|
Constraints:
- An investment can be selected or not. One cannot select a fraction of an investment.
- Exactly 3 stocks are selected.
- If stock 2 is selected, then so is stock 1.
- If stock 1 is selected, then stock 3 is not selected.
- Either stock 4 is selected or stock 5 is selected, but not both.
• Formulate an optimization program to find the optimal strategy.
Question (2)
Tom Brown has inherited $1000. He has to decide how to invest the money for one year. A broker has suggested five potential investments.
- Gold
- Junk Bond
- Growth Stock
- Certificate of Deposit
- Stock Option Hedge
The return on each investment depends on the (uncertain) market behavior during the year. Tom would build a payoff table, shown below, to help make the investment decision.
|
Decision
|
|
States of Nature
|
|
|
|
|
Alternatives
|
Large Rise
|
Small Rise
|
No Change
|
Small Fall
|
Large Fall
|
|
Gold
|
-100
|
100
|
200
|
300
|
0
|
|
Bond
|
250
|
200
|
150
|
-100
|
-150
|
|
Stock
|
500
|
250
|
100
|
-200
|
-600
|
|
C/D account
|
60
|
60
|
60
|
60
|
60
|
|
Stock option
|
200
|
150
|
150
|
-200
|
-150
|
|
Probability
|
0.2
|
0.3
|
0.3
|
0.1
|
0.1
|
Find the optimal decision using the Maximax and the Maximin Criteria.