You are the manager of a £100 million portfolio, and you have 6 investment options: • First Mortgages: return 9% and risk score 3 Second Mortgages: return 12% and risk score 6 Personal Loans: return 15% and risk score 8 Commercial Loans: return 8% and risk score 2 Government Securities: return 6% and risk score 1 Saving Account: return 3% and risk score 0 The current regulation requires that the amount allocated in second mortgages and personal loans (combined) should not exceed the amount allocated in first mortgages. Given this information: 1. Ignoring the risk involved in the different investment options, what is the profit maximizing allocation of resources? What are the expected profits? 2. Now, you have to consider the risk associated with the investments. The average risk of your portfolio cannot exceed 5. What is the profit maximizing allocation of resources? What are the expected profits? The average risk is computed as follows: Av=krixi xi where: xi is the amount allocated in the investment option i and ri is the risk score of investment option i. 3. A new legislation is approved, now at least 20% of the money allocated in risky investments (risk score greater than zero) should be allocated in commercial loans. How does the new legislation change your optimal allocation? What is the new expected profit?
You are the manager of a £100 million portfolio, and you have 6 investment options: • First Mortgages: return 9% and risk score 3 Second Mortgages: return 12% and risk score 6 Personal Loans: return 15% and risk score 8 Commercial Loans: return 8% and risk score 2 Government Securities: return 6% and risk score 1 Saving Account: return 3% and risk score 0 The current regulation requires that the amount allocated in second mortgages and personal loans (combined) should not exceed the amount allocated in first mortgages. Given this information: 1. Ignoring the risk involved in the different investment options, what is the profit maximizing allocation of resources? What are the expected profits? 2. Now, you have to consider the risk associated with the investments. The average risk of your portfolio cannot exceed 5. What is the profit maximizing allocation of resources? What are the expected profits? The average risk is computed as follows: Av=krixi xi where: xi is the amount allocated in the investment option i and ri is the risk score of investment option i. 3. A new legislation is approved, now at least 20% of the money allocated in risky investments (risk score greater than zero) should be allocated in commercial loans. How does the new legislation change your optimal allocation? What is the new expected profit?
Operations Research : Applications and Algorithms
4th Edition
ISBN:9780534380588
Author:Wayne L. Winston
Publisher:Wayne L. Winston
Chapter23: Simulation With The Excel Add-in @risk
Section23.1: Introduction To @risk: The News Vendor Problem
Problem 4P
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Transcribed Image Text:You are the manager of a £100 million portfolio, and you have 6 investment options:
First Mortgages: return 9% and risk score 3
Second Mortgages: return 12% and risk score 6
Personal Loans: return 15% and risk score 8
Commercial Loans: return 8% and risk score 2
Government Securities: return 6% and risk score 1
Saving Account: return 3% and risk score 0
The current regulation requires that the amount allocated in second mortgages and personal
loans (combined) should not exceed the amount allocated in first mortgages.
Given this information:
1. Ignoring the risk involved in the different investment options, what is the profit
maximizing allocation of resources? What are the expected profits?
2.
Now, you have to consider the risk associated with the investments. The average risk of
your portfolio cannot exceed 5. What is the profit maximizing allocation of resources?
What are the expected profits?
The average risk is computed as follows:
Av=Ekrixi
Xi
where: xi is the amount allocated in the investment option i and ri is the risk score of
investment option i.
3. A new legislation is approved, now at least 20% of the money allocated in risky
investments (risk score greater than zero) should be allocated in commercial loans. How
does the new legislation change your optimal allocation? What is the new expected
profit?
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