INVESTMENT STRATEGY CASE

INVESTMENT STRATEGY CASE:

INVESTMENT STRATEGY CASE AMIT KUMAR (PGDMA-1001)

J.D.WILLIAM, INC.:

J.D.WILLIAM, INC. Investment advisory firm Managing $120 million funds for its clients ASSET ALLOCATION MODEL Growth stock fund(GF) Income fund(IF) Money market fund(MMF) Amount Invested 20-40% of Total Portfolio 20-50% of Total Portfolio >=(at least) 30% of Total Portfolio RISK 0.10 0.07 0.01 Annual YIELD 18% of GF (0.18GF) 12.5% of IF (0.125IF) 7.5% of MMF (0.075MMF)

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Overall portfolio risk index=weighted avg. of the risk rating for the 3 funds. R= W1= , R1=0.1 W2 = , R2=0.07 W3 = , R3=0.01 Contracted with a client, having $ 8,00,000 to invest Problem- T o allocate $8lakh among the growth, income &Money market funds. To develop an L.P model that provide maximum yield for the portfolio. To develop a managerial report on the L.P model.

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Decision Variables- GF, IF, MMF Objective function- To maximize the total yield for the portfolio Max 0.18GF + 0.125IF + 0.075MMF Maximum Risk index given=0.05 Model Formulation Constraints- 1GF + 1IF + 1MMF <= 800,000 ($ amount available to invest) GF >= 0.2* (GF+IF+MMF) 0.80GF -0.20IF -0.20MMF >= 0 (Min growth fund) GF <= 0.4* (GF+IF+MMF) 0.60GF -0.40IF -0.40MMF <= 0 (Max growth fund) IF >= 0.2* (GF+IF+MMF) -0.20GF +0.80IF -0.20MMF > 0 (Min income fund) IF <= 0.5* (GF+IF+MMF) -0.50&F +0.50IF -0.50MMF <= 0 (Max income fund) MMF >= 0.3* (GF+IF+MMF) -0.30GF -0.30IF +0.70MMF >= 0 (Min money market fund) 0.1*GF+0.07*IF+0.01*MMF <= 0.05* (GF+IF+MMF) 0.05GF +0.021F -0.04MMF <= 0 (Max risk) ,GF,IF,MMF >= 0

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Q1.) solution- Fund Allocation- GF IF MMF SUM TOTAL $248888.8889 $160000 $391111.1111 $800000 Yield = $94133 Yield (in %) = = 11.8 %.

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Q2) solution- if the client's Risk index were increased by 0.05%,(from 0.05 to 0.055), the annual yield on investment would increase by $4,667 , from the original optimal estimation of $94,133 to a new projection of $98,800 . Fund Allocation- GF IF MMF SUMTOTAL $293333.33 $160000 $346666.67 $800000 Annual yield in (%) = = 12.35 %

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Q3) solution- Growth fund revised downward to 14% Limit for Growth fund= 0.18 to (“0.18 - 0.03”) = 0.15 (N.B : 0.03 is allowable decrease for GF) Since 0.16 is in the objective coefficient range for the growth fund return, there would be no change in allocation . However, the return would decrease by (0.02)*($248,889) or ($94133 - $89155) = $4978 Growth fund revised downward to 14% A decrease to 0.14 is outside the objective function coefficient range . So, we have to resolve the problem . “MAX 0.14GF +0.125IF +0.075MMF” Change in yield = ($94133 - $85066) = $9067

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Q4) solution- Since the current optimal solution has more invested in the growth fund than the income fund. So, for adding this requirement we have to resolve the problem with a new constraint . Max 0.18GF + 0.125IF +0.075MMF Maximum Risk index given=0.05 Constraints 1GF + 1IF + 1MMF <= 800,000 0.80GF -0.20IF -0.20MMF >= 0 0.60GF -0.40IF -0.40MMF <= 0 -0.20GF +0.80IF -0.20MMF > 0 -0.50&F +0.50IF -0.50MMF <= 0 -0.30GF -0.30IF +0.70MMF >= 0 0.05GF +0.021F -0.04MMF <= 0 1GF-1IF <= 0

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the value of the solution has decreased from $94,133 to $93,067. This is only a decrease of 0.2% in yield . Since the yield decrease is so small, We may prefer this portfolio.

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Q5.) solution- we would recommend the use of this model only when the clients meet the given criteria, i.e., similar objective functions and constraints . since, they are financial investment advisor working for the individual investors according to their need. So , we would not recommend the use of this asset allocation model as a general guide to financial investment. EXCEL SOLUTION OF THE CASE

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EXCEL SHEET OF THE CASE Do right click and open worksheet object.then whole excel will open in separate. COMPLETE SHEET