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 to 10 (with 10 being the most risky) is assigned to each of the 2 stocks. The total risk of the portfolio is found by multiplying the risk of each stock by the dollars invested in each stock.
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Let x = the proportion of the investment in Petrochemical. Then 1 - x is the proportion of the investment in Utility. To maximize the return the investor should ...
This solution analyzes the risk and return involved with investing in two different stocks.