National Insurance Associates carries an investment portfolio of stocks, bonds and other investment alternatives. Currently $200,000 of funds are available and must be considered for new investment opportunities. The four stock options National is considering and the relevant financial data are as follows:

                                                                                                Stock

 

                                                                        A                     B                      C                     D

Price per share ($)                                100                  50                    80                    40

Annual rate of return                             0.12                 0.08                 0.06                 0.10

Risk measure per dollar invested           0.10                 0.07                 0.05                 0.08

 

The risk measure indicates the relative uncertainty associated with the stock in terms of its realizing the projected annual return; higher values indicate greater risk. The risk measures are provided by the firm’s top financial advisor.

 

National’s top management has stipulated the following investment guidelines: the annual rate of return for the portfolio must be at least 9% and no one stock can account for more than 50% of the total dollar investment.

 

Use linear programming to develop an investment portfolio that minimizes risk.

If the firm ignores risk and uses a maximum return-on-investment strategy, what is the investment portfolio?

What is the dollar difference between the portfolio in parts (a) and (b)? Why might the company prefer the solution in part (a)?