NAME: FASASI OLAWALE

MATRIC NOS: 2023-28-E-1463

Question: Discuss Linear Programming applications in your industry/ profession and
create a use case.
Answer:
Linear Programming (LP) is a mathematical technique for maximizing or minimizing a linear
function of several variables, such as output or cost. Linear programming has various uses in
asset management organizations. Here are some practical applications and examples:
Portfolio Management:
Portfolio management is the process of selecting, prioritizing, and controlling an organization's
portfolio of investment in accordance with its strategic goals and capacity to deliver. The
objective involves selecting assets with minimal risk and high return. This can be determined by
evaluating historical performance, risk, and budgetary constraints using linear programming.
Classification and Management of Assets:
Equity, fixed income, and cash and equivalents are the three primary asset classes. The asset
allocation or balance of an Asset Management Company is the basis for portfolio construction.
After determining the asset allocation, specific investment securities are selected. A key aspect
of financial planning and investment advice is determining the appropriate asset allocation.
Considering the risk-return profile, Linear Programming can be used to allocate investments
across various asset classes.
Risk Mitigation:
Risk mitigation entails establishing procedures to prevent, minimize, or lessen the impact of risks
on organizations. It entails anticipating and preventing the occurrence of hazards that could have
a negative effect on the organization. A robust risk mitigation plan assists organizations in
establishing procedures to avoid risks, minimize risks, or reduce the impact of risks.
Asset Under Management:
Asset under management employs assets and cash flows to assist a company in meeting its
financial obligations. Linear planning optimizes asset-liability alignment, thereby minimizing
risk and maximizing profits.
Taxation Management:
Tax management involves making fiscal decisions that are tax efficient. Considerations
pertaining to taxes include when you are paid, how much you anticipate spending, and the size of
your portfolio. Linear Programming can reduce such taxes while maintaining investment profits.
Use Case of Linear Programming in an Asset Management Company
In formulating a given problem as an LP model, the problem must be restated in the
mathematical form which includes some stages.
(a) State the objective function to be optimized and the constraints attached to the achieving
objective.
(b) State and Constraints Function
(c) Write the mathematical expression that will indicate the variables and constraints by applying
the appropriate relationship sign.
(d) Express the non-negativity constraints mathematically.

For the Asset Management Company under consideration:

Objective Function:
Maximizing the total return on investment (ROI) while managing risk within predefined limits.

Constraint Function:

The company will adhere to certain constraints while allocating assets. These constraints can be
based on factors such as risk tolerance, asset class limits, and liquidity requirements.

Liquidity Constraint:
The total amount to be invested will not exceed the liquid capital available. This can be
represented as:
x1 + x2 + ... + xa <= Cash Availability ---------Liquidity Constarint

Asset Class Constraints:

The allocation percentages for each asset should satisfy certain limits based on the firm’s
Portfolio. There might be a minimum allocation percentage for each asset class these constraints
can be represented as:
x1 + x2 + ... + xb <= Asset Class Percentage-----------Asset Class Constraint

Risk Tolerance Constraints:

The risk profile of the company will determine the amount to be invested in a class of
investment. This will be represented by:

x1 + x2 + ... + xc <= Risk Tolerance Percentage-----------Risk Tolerance Constraint

Non- Negativity Factor:

Xa+Xb+Xc>=0 Non-Negativity Function