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Case Study: Investment Strategy R. U. Mutton, Inc. is an investment advisory firm that manages over $120 million in funds for its numerous clients. The company employs an asset allocation model that recommends the portion of each client's portfolio that should be invested in a growth stock fund, an income fund, and a money market fund. To maintain diversity in each client's portfolio, the firm places limits on the percentage of each portfolio that may be invested in each of the three funds. General guidelines indicate that the amount invested in the growth fund must be between 20 and 40% of the total portfolio value. Similarly, between 20 and 50% of the total portfolio value must be in the income fund and at least 20% of the total portfolio value must be in the money market fund. In addition, the company attempts to assess the risk tolerance of each client and adjust the portfolio to meet the needs of the individual investor. For example, Mutton just contracted with a new client who has $800.000 to invest. Based on their evaluation of the client's risk tolerance, Mutton has assigned a maximum risk index of 0.05 for the client. The firm's risk indicators show the risk of the growth fund at 0.10, the income fund at 0.07 and the money market at.01. An overall portfolio risk index is computed as a weighted average of the risk rating for the three funds where the weights are the fraction of the client's portfolio invested in each of the funds. Mutton is currently forecasting annual yields of 12% for the growth fund, 6.5% for the income fund, and 2% for the money market fund. Given the information provided, how should the new client be advised to allocate the $800,000 among the growth income and money market funds? Develop a linear programming model that will provide the maximum yield for the portfolio. Use your model to develop a managerial report that includes the following analysis. Managerial Report: 1. Recommend how much of the $800,000 should be invested in each fund. What is the annual yield you anticipate for the investment recommendation? 2. By how much would the client's risk tolerance have to increase to generate a different allocation. What would be the yield of the modified model? 3. In the original solution how would the investment recommendation change if the annual yield for the growth fund were revised downward? Case Study: Investment Strategy R. U. Mutton, Inc. is an investment advisory firm that manages over $120 million in funds for its numerous clients. The company employs an asset allocation model that recommends the portion of each client's portfolio that should be invested in a growth stock fund, an income fund, and a money market fund. To maintain diversity in each client's portfolio, the firm places limits on the percentage of each portfolio that may be invested in each of the three funds. General guidelines indicate that the amount invested in the growth fund must be between 20 and 40% of the total portfolio value. Similarly, between 20 and 50% of the total portfolio value must be in the income fund and at least 20% of the total portfolio value must be in the money market fund. In addition, the company attempts to assess the risk tolerance of each client and adjust the portfolio to meet the needs of the individual investor. For example, Mutton just contracted with a new client who has $800.000 to invest. Based on their evaluation of the client's risk tolerance, Mutton has assigned a maximum risk index of 0.05 for the client. The firm's risk indicators show the risk of the growth fund at 0.10, the income fund at 0.07 and the money market at.01. An overall portfolio risk index is computed as a weighted average of the risk rating for the three funds where the weights are the fraction of the client's portfolio invested in each of the funds. Mutton is currently forecasting annual yields of 12% for the growth fund, 6.5% for the income fund, and 2% for the money market fund. Given the information provided, how should the new client be advised to allocate the $800,000 among the growth income and money market funds? Develop a linear programming model that will provide the maximum yield for the portfolio. Use your model to develop a managerial report that includes the following analysis. Managerial Report: 1. Recommend how much of the $800,000 should be invested in each fund. What is the annual yield you anticipate for the investment recommendation? 2. By how much would the client's risk tolerance have to increase to generate a different allocation. What would be the yield of the modified model? 3. In the original solution how would the investment recommendation change if the annual yield for the growth fund were revised downward

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