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Rosen, Inc. (B&R) is a brokerage
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Blair and Rosen, Inc. (B&R) is a brokerage firm that specializes in...
Blair and Rosen, Inc. (B&R) is a brokerage firm that specializes in investment portfolios designed to meet the specific risk tolerances of its
clients. A client who contacted B&R this past week has a maximum of $50,000 to invest. B&R's investment advisor decides to recommend
a portfolio consisting of two investment funds: an Internet fund and a Blue Chip fund. The Internet fund has a projected annual return of
12%, while the Blue Chip fund has a projected annual return of 9%. The investment advisor requires that at most $35,000 of the client's
funds should be invested in the Internet fund. B&R services include a risk rating for each investment alternative. The Internet fund, which is
the more risky of the two investment alternatives, has a risk rating of 6 per thousand dollars invested. The Blue Chip fund has a risk rating
of 4 per thousand dollars invested. For example, if $10,000 is invested in each of the two investment funds, B&R's risk rating for the
portfolio would be 6(10) + 4(10) = 100. Finally, B&R developed a questionnaire to measure each client's risk tolerance. Based on the
responses, each client is classified as a conservative, moderate, or aggressive investor. Suppose that the questionnaire results classified
the current client as a moderate investor. B&R recommends that a client who is a moderate investor limit his or her portfolio to a maximum
risk rating of 240.

a. What is the recommended investment portfolio for this client? What is the annual return for the portfolio?

b. Suppose that a second client with $50,000 to invest has been classified as an aggressive investor. B&R recommends that the maximum
portfolio risk rating for an aggressive investor is 320. What is the recommended investment portfolio for this aggressive investor? Discuss
what happens to the portfolio under the aggressive investor strategy.

c. Suppose that a third client with $50,000 to invest has been classified as a conservative investor. B&R recommends that the maximum
portfolio risk rating for a conservative investor is 160.

Develop the recommended investment portfolio for the conservative investor. Discuss the interpretation of the slack variable for the total
investment fund constraint.

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Answered by shrugal

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Let I = Internet fund investment in thousands

4
Search Expert Help Study Resources Upgrade P
B = Blue Chip fund investment in thousands

Max 0.12

I + 0.09

B 1I

1I

6I + 1B + 4B s.t. 50 35 240 Available investment funds

Maximum investment in the internet fund

섘 Maximum risk for a moderate investor I, B 0 B Blue Chip Fund (000s) 60 Risk Constraint

Optimal Solution

Blue Chip.doc
I = 20, B = 30

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