1 / 6

Problem 7-20

Problem 7-20. Texas lotto winner has decided to invest $50,000 a year in the stock market. Stocks for consideration are a petrochemical firm and a public utility. Risk index is assigned to each of the stocks: Petrochemical = 9 Utility = 4

iman
Download Presentation

Problem 7-20

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Problem 7-20 • Texas lotto winner has decided to invest $50,000 a year in the stock market. • Stocks for consideration are a petrochemical firm and a public utility. • Risk index is assigned to each of the stocks: Petrochemical = 9 Utility = 4 • Maximize the return, but the average risk index should not be higher than 6. • Estimated Returns: Petrochemical = 12% Utility = 6% Kelly Devilbiss - Problem 7-20

  2. Solve for: • How much should be invested for each stock? • What is the average risk for this investment? • What is the estimated return for this investment? Kelly Devilbiss - Problem 7-20

  3. QM for Windows P = Petrochemical / U = Utility Maximize: Estimated % return for each stock Total Investment: 1P + 1U = $50,000 Risk Index: 9P + 4U ≤ $300,000 because the average risk index should not be higher than 6. (9P + 4U)/$50,000 ≤ 6 [$50,000 x 6 = $300,000] Estimated Return: .12P + .06U ≤ $6,000 [$6,000 would be the maximum return possible] Kelly Devilbiss - Problem 7-20

  4. QM for Windows - Solve How much should be invested in each stock? Petrochemical = $20,000 Utility = $30,000 What is the estimated return for this investment? $4,200 Kelly Devilbiss - Problem 7-20

  5. Kelly Devilbiss - Problem 7-20

  6. What is the average risk for this investment? 9P + 4U / $50,000 = average risk 9(20,000) + 4(30,000) / 50,000 = 180,000 + 120,000 / 50,000 = 300,000 / 50,000 = 6 Average risk = 6 Kelly Devilbiss - Problem 7-20

More Related