3. At least 30% of the investment should be in treasury bills and certificates of deposit.

4. To be safe, more should be invested in CDs and treasury bills than in municipal bonds and
the growth stock fund, by a ratio of at least 1.2 to 1.
Kathleen wants to invest the entire $70,000.
Decision Variables
Four decision variables represent the monetary amount invested in each investment alternative:
deposit
The Objective Function
The objective of the investor is to maximize the total return from the investment in the four alternatives.
The total return is the sum of the individual returns from each alternative. Thus, the
objective function is expressed as
where
deposit
Model Constraints
In this problem, the constraints are the guidelines established for diversifying the total investment.
Each guideline is transformed into a mathematical constraint separately.
The first guideline states that no more than 20% of the total investment should be in
municipal bonds. The total investment is $70,000; 20% of $70,000 is $14,000. Thus, this
constraint is
The second guideline indicates that the amount invested in certificates of deposit should
not exceed the amount invested in the other three alternatives. Because the investment in certificates
of deposit is x2 and the amount invested in the other alternatives is the
constraint is
This constraint is not in what we referred to in Chapter 3 as standard form for a computer
solution. In standard form, all the variables would be on the left-hand side of the inequality
and all the numeric values would be on the right side. This type of constraint can be used
in Excel just as it is shown here; however, for solution with QM for Windows, all constraints
must be in standard form. We will go ahead and convert this constraint and others in this model
to standard form, but when we solve this model with Excel, we will explain how the model
constraints could be used in their original (nonstandard) form. To convert this constraint to
standard form, must be subtracted from both sides of the sign to put this constraint
in proper form:
x2 - x1 - x3 - x4 … 0
x1 + x3 + x4 …
(…),
x2 … x1 + x3 + x4
x1 + x3 + x4,
x1 … +14,000
0.130x4 = return from the investment in growth stock fund
0.065x3 = return from the investment in treasury bills
0.05x2 = return from the investment in certificates of
0.085x1 = return from the investment in municipal bonds
Z = total return from all investments
maximize Z = +0.085x1 + 0.05x2 + 0.065x3 + 0.130x4
x4 = amount (+) invested in growth stock fund
x3 = amount (+) invested in treasury bills
x2 = amount (+) invested in certificates of
x1 = amount (+) invested in municipal bonds
AN INVESTMENT EXAMPLE 121
Standard form
requires all variables
to be to the left of the
inequality and
numeric values
to the right.