The Heinlien and Krampf Brokerage has just been instructed by one its clients to invest $250,000 for her money obtained recently through the sale of land holdings in Ohio. The client has a good deal of trust in the investment house, but also has her own ideas about the distribution of the funds being invested. In particular, she requests that the firm select whatever stocks and bonds they believe are wel rated, but within the following guidelines:
(a) Municipals bonds should constitute at least 20% of the investment.
(b) At least 40% of the funds should be placed in a combination of electronic firms, aerospace firms, and drug manufacturers.
(c) No more than 50% of the amount invested in municpal bonds should be placed in a high-risk high-yield nursing home stock.
Subject to this restraints, the client's goal is to maximize project return of investments. The analysts at Heinlien and Krampf, aware of these guidelines, prepare a list of high-quality stocks and their corresponding rates of return:
Los Angeles municipal bonds - 5.3%
Thompson Electronics Inc - 6.8%
United Aerospace Corp - 4.9%
Palmer Drugs - 8.4%
Happy Days Nursing Homes - 11.8%
1. Formulate this portfolio selection problem using Linear Programming.
2. Solve this problem.
Linear programming formulation. Solution by excel solver.