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I need help with this problem. It involves financial engineering. I hope you can help with it :)IE 460
Extra Credit - Financial Engineering (Sharpe’s LP Model)
To be done individually. (Due April 27, 2015)
Sharpe’s Portfolio Optimization Model
An investor has $100,000 to invest in mutual funds.
She has identified 10 funds for
possible investment.
Type of Fund
Average Annual
Return
Beta Risk
Growth Funds
Fund 1
30%
1.4
Fund 2
20%
1.2
Fund 3
15%
1.0
Fund 4
25%
1.3
Growth and Income Funds
Fund 5
16%
0.9
Fund 6
17%
0.95
Fund 7
12%
0.75
Income funds
Fund 8
8.0
0.6
Fund 9
6.0
0.4
Money Market Fund
Fund 10
4.0
0.0
Even though the investor is interested in the “Growth” of her portfolio, she has the following
investment restrictions.
(i)
No more than $20,000 should be invested in any one fund.
(ii)
Between 20 and 40% should be invested in growth funds.
(iii)
At least $5,000 should be available as ready cash in the money market fund.
(iv)
At least 10% should be invested in income funds.
(v)
At least 15% should be invested in growth and income funds.
Formulate the problem of determining the optimal investment portfolio as a bi-criteria problem if
the objectives were to maximize portfolio return and minimize portfolio’s Beta Risk.
You must
define all your variables clearly, and write out the constraints and the objective functions.
This question was answered on: Sep 21, 2023
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