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
ESTIMATED RETURN
RISK INDEX
Petrochemical
12%
9
Utility
6%
4
The investor would like to maximize the return on the investment, but the average risk
index of the investment 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? QX
Answer: P=Petrochemical U=Utility
LINEAR PROGRAM
Max Profit =
Subject to:
Graph:
neg)
(hours)
(feet)
(non-
Points for line 1:
Points for line 2:
Optimal Solution:
