INVESTMENT

STRATEGY CASE

AMIT KUMAR
(PGDMA-1001)
 J.D.WILLIAM, INC.
O Investment advisory firm

O Managing $120 million funds for its clients

ASSET ALLOCATION
ASSETMODEL
ALLOCATION
MODEL

Growth Money
Income
stock market
fund(IF)
fund(GF) fund(MMF)
Amount 20-40% of Total 20-50% of Total >=(at least) 30% of
Invested Portfolio Portfolio Total Portfolio
RISK 0.10 0.07 0.01
Annual 18% of GF 12.5% of IF 7.5% of MMF
YIELD (0.18GF) (0.125IF) (0.075MMF)
 O  Overall portfolio risk index=weighted avg. of the risk
rating for the 3 funds.
O R=
O W1= , R1=0.1
O W2= , R2=0.07
O W3= , R3=0.01

Contracted with a client, having $ 8,00,000 to invest

Problem-
 To allocate $8lakh among the growth, income &Money market
funds.
 To develop an L.P model that provide maximum yield for the
portfolio.
 To develop a managerial report on the L.P model.
 Model Formulation
O Decision Variables- GF, IF, MMF
O Objective function- To maximize the total yield for the portfolio
O Max 0.18GF + 0.125IF +0.075MMF
O Maximum Risk index given=0.05
Constraints-
I. 1GF + 1IF + 1MMF <= 800,000 ($ amount available to invest)
II. GF >= 0.2* (GF+IF+MMF)
0.80GF -0.20IF -0.20MMF >= 0 (Min growth fund)
III. GF <= 0.4* (GF+IF+MMF)
0.60GF -0.40IF -0.40MMF <= 0 (Max growth fund)
IV. IF >= 0.2* (GF+IF+MMF)
-0.20GF +0.80IF -0.20MMF > 0 (Min income fund)
V. IF <= 0.5* (GF+IF+MMF)
-0.50&F +0.50IF -0.50MMF <= 0 (Max income fund)
VI. MMF >= 0.3* (GF+IF+MMF)
-0.30GF -0.30IF +0.70MMF >= 0 (Min money market fund)
VII.0.1*GF+0.07*IF+0.01*MMF <= 0.05* (GF+IF+MMF)
0.05GF +0.021F -0.04MMF <= 0 (Max risk)
,GF,IF,MMF >= 0
O Q1.) solution-

Fund Allocation-

GF IF MMF SUM TOTAL

$248888.8889 $160000 $391111.1111 $800000

 Yield = $94133

Yield (in %) = = 11.8 %.

 INVESTMENT STRATEGY CASE
Amount invested(in%) RISK YIELD
lowerlimit upper limit
GF 20% 40% 0.1 18%
IF 20% 50% 0.07 12.50%
MMF 30% 0.01 7.50%

Total Fund $8,00,000

Total risk 0.050
objective function
MaX. Yield 94133.33333

Decision Variables

GF IF MMF SUMTOTAL
248888.8889 160000 391111.1111 800000

Constraints
GF+IF+MMF 800000 <= $8,00,000
GF 88888.89 >= 0
GF -71111.1 <= 0
IF 0 >= 0
IF -240000 <= 0
MMF 151111.1 >= 0
O Q2) solution-
if the client's Risk index were increased by 0.05%,(from
0.05 to 0.055), the annual yield on investment would
increase by $4,667, from the original optimal estimation
of $94,133 to a new projection of $98,800.
Fund Allocation-
GF IF MMF SUMTOTAL
$293333.33 $160000 $346666.67 $800000

  Annual yield in (%) = = 12.35%

 Amount invested(in%) RISK YIELD
lowerlimitupper limit
GF 0.2 0.4 0.1 0.18
IF 0.2 0.5 0.07 0.125
MMF 0.3 0.01 0.075

Total Fund 800000

Total risk 0.055
objective function Change in yield
MaX. Yield 98800 4667

Decision Variables

GF IF MMF SUMTOTAL
293333.33 160000 346666.6667 800000

Constraints
GF+IF+MMF 800000 <= 800000
GF 133333.3 >= 0
GF -26666.67 <= 0
IF 0 >= 0
IF -240000 <= 0
MMF 106666.7 >= 0
RISK 0 <= 0
O Q3) solution-
Growth fund revised downward to 14%
 Limit for Growth fund= 0.18 to (“0.18 - 0.03”) = 0.15
(N.B : 0.03 is allowable decrease for GF)
 Since 0.16 is in the objective coefficient range for the
growth fund return, there would be no change in
allocation. However, the return would decrease by
(0.02)*($248,889) or ($94133 - $89155) = $4978

Growth fund revised downward to 14%

A decrease to 0.14 is outside the objective function
coefficient range . So, we have to resolve the problem.
“MAX 0.14GF +0.125IF +0.075MMF”
Change in yield = ($94133 - $85066) = $9067
 INVESTMENT STRATEGY CASE
Amount invested(in%) RISK YIELD
lowerlimit upper limit
GF 20% 40% 0.1 16%
IF 20% 50% 0.07 12.50%
MMF 30% 0.01 7.50%

Total Fund $8,00,000

Total risk 0.050
objective function change in yield
MaX. Yield 89155.55556 4978

Decision Variables

GF IF MMF SUMTOTAL
248888.8889 160000 391111.1111 800000

Constraints
GF+IF+MMF 800000 <= $8,00,000
GF 88888.89 >= 0
GF -71111.1 <= 0
IF 0 >= 0
IF -240000 <= 0
MMF 151111.1 >= 0
RISK 0 <= 0
 INVESTMENT STRATEGY CASE
Amount invested(in%) RISK YIELD
lowerlimit upper limit
GF 20% 40% 0.1 14%
IF 20% 50% 0.07 12.50%
MMF 30% 0.01 7.50%

Total Fund $8,00,000

Total risk 0.050
objective function change in yield
MaX. Yield 85066.66667 9067

Decision Variables

GF IF MMF SUMTOTAL
160000 293333.33 346666.6667 800000

Constraints
GF+IF+MMF 800000 <= $8,00,000
GF -1.43831E-07 >= 0
GF -160000 <= 0
IF 133333.3333 >= 0
IF -106666.6667 <= 0
MMF 106666.6667 >= 0
RISK -5.71163E-09 <= 0
Q4) solution-
Since the current optimal solution has more invested in the growth fund
than the income fund. So, for adding this requirement we have to resolve the
problem with a new constraint.

Max 0.18GF + 0.125IF +0.075MMF

Maximum Risk index given=0.05
Constraints
I. 1GF + 1IF + 1MMF <= 800,000
II. 0.80GF -0.20IF -0.20MMF >= 0
III. 0.60GF -0.40IF -0.40MMF <= 0
IV. -0.20GF +0.80IF -0.20MMF > 0
V. -0.50&F +0.50IF -0.50MMF <= 0
VI. -0.30GF -0.30IF +0.70MMF >= 0
VII. 0.05GF +0.021F -0.04MMF <= 0
VIII. 1GF-1IF <= 0
 INVESTMENT STRATEGY CASE
Amount invested(in%) RISK YIELD
lowerlimit upper limit
GF 20% 40% 0.1 18%
IF 20% 50% 0.07 12.50%
MMF 30% 0.01 7.50%

Total Fund $8,00,000

Total risk
objective function
the value of the solution has
0.050

MaX. Yield 93066.66667 decreased from $94,133 to

Decision Variables $93,067. This is only a decrease
GF ofIF 0.2% inMMF
yield. Since the yield
SUMTOTAL
213333.3333 213333.3 373333.3333
decrease is so small, We800000
may prefer
this portfolio.
Constraints

GF+IF+MMF 800000 <= $8,00,000

GF 53333.3333 >= 0
GF -106666.667 <= 0
IF 53333.3333 >= 0
IF -186666.667 <= 0
MMF 133333.333 >= 0
RISK -2.2883E-09 <= 0
GF-IF -1.85E-08 <= 0
OQ5.) solution-
we would recommend the use of this model only
when the clients meet the given criteria, i.e., similar
objective functions and constraints.
since, they are financial investment advisor working for
the individual investors according to their need. So, we
would not recommend the use of this asset allocation
model as a general guide to financial investment.

EXCEL SOLUTION OF THE CASE

X Do right c
C lick
open work and
E shAmount
eet invested(in%)
object.the RISK YIELD
n whlowerlimit
ole
L C e
GF xcel will
upper limit
open in 20% 20% 40% 0.1 18%

O IF
separate. 50% 0.07 12.50%

S
MMF 30% 0.01 7.50%

H
M Total Fund $8,00,000

P
Total risk 0.050
E objective function

E L MaX. Yield 94133.33333

T E Decision Variables

T GF IF MMF SUMTOTAL
O 248888.8889 160000 391111.1111 800000
F E

T S Constraints
H H GF+IF+MMF 800000 <= $8,00,000
E
E GF
GF
88888.89
-71111.1
>=
<=
0
0
E IF 0 >= 0
IF -240000 <= 0
T MMF 151111.1 >= 0
RISK 0 <= 0
C
A