Question

A winner of the Texas Lotto has decided to invest $50,000 per year in the stock market. Under consideration are stocks for a petrochemical firm and a public utility. Although a long-range goal is to get the highest possible return, some consideration is given to the risk involved with the stocks. A risk index on a scale of 1-10 (with 10 being the most risky) is assigned to each of the two stocks. The total risk of the portfolio is found by multiplying the risk of each stock by the dollars invested in that stock. The following table provides a summary of the return and risk: STOCK RETURN RISK Petrochemical 12% 9 Utility 6% 4 The investor would like to maximize the return on the investment, but the average risk index of the in-vestment should not be higher than 6. How much should be invested in each stock? What is the average risk for this investment? What is the estimated return for this investment?

Please explain where 20,000 and 30,000 came from without excel.

Answer 1

Petrochemical return 12% Risk 9

Utilit return 6% Risk 4

Goa is to maximise rturn with Risk not high er than 6

As petrochem goves higher return we have to maximise investment in petrochemical and have minimise investment in lower return investment of utility

As average has to be 6 so we have to invest more in lower risk co that is utility and less in petrochemical

So Assume 30000 is invested in Utility and balance 20000 in Petrochemical

Check for average risk = (30000*4)+(20000*9)/50000=6

So amount to be invested is $ 30,000 in utility and $ 20,000 in petrochemical

Average riks of investment has index of 6

Estimated return is (30000*6%+20000*12%)/50000=8.40%