23.03.2023 - 04:25

A client asks his stockbroker to invest 100,000 for maximum annual income, subject to the three conditions: *1. Spread the investment over no more than three different stocks. *2. Put no more than 40 percent of the money into any one stock. *3. Put a min

A client asks his stockbroker to invest $100,000 for maximum annual income, subject to the three conditions:

  • 1. Spread the investment over no more than three different stocks.
  • 2. Put no more than 40 percent of the money into any one stock.
  • 3. Put a minimum of $10,000 into an oil stock.

The broker has identified three stocks for investment. Their estimated annual returns per share and price per share are shown in the following table:

Stock Price per share Estimate annual return per share
Oil $120 $11
Auto $62 $4
Pharmaceutical $18 $2

The client wishes to use LP to determine the optimal number of shares to buy for each stock, so as to maximize the total estimated return.

a) Write down the decision variables.

b) Write down the optimization statement for the objective function.

c) Write down the constraints.

Answers (1)
  • Chiko-intruder
    April 4, 2023 в 09:07

    a) The decision variables are the number of shares to be bought for each of the three stocks.

    Let x1 be the number of shares to be bought for the oil stock. Let x2 be the number of shares to be bought for the auto stock. Let x3 be the number of shares to be bought for the pharmaceutical stock.

    b) The objective function to be maximized is the total estimated return of the investment. It can be written as follows:

    maximize 11x1 + 4x2 + 2x3

    This objective function is the sum of the estimated annual returns of each stock multiplied by the number of shares bought for that stock.

    c) The constraints are as follows:

    1. The total amount invested should not exceed $100,000. This can be expressed as:

    120x1 + 62x2 + 18x3 ≤ 100,000

    This constraint ensures that the total investment does not exceed the available amount.

    1. The investment should be spread over no more than three different stocks. This can be expressed as:

    x1 + x2 + x3 ≤ 3

    This constraint ensures that the investment is diversified across a maximum of three stocks.

    1. No more than 40% of the investment should be put into any one stock. This can be expressed as:

    x1 ≤ 0.4(120x1 + 62x2 + 18x3) x2 ≤ 0.4(120x1 + 62x2 + 18x3) x3 ≤ 0.4(120x1 + 62x2 + 18x3)

    These constraints ensure that no more than 40% of the investment is put into any one stock.

    1. A minimum of $10,000 should be put into the oil stock. This can be expressed as:

    x1 ≥ 10,000/120

    This constraint ensures that the minimum investment required in the oil stock is met.

    Therefore, the complete linear programming problem can be written as follows:

    maximize 11x1 + 4x2 + 2x3 subject to: 120x1 + 62x2 + 18x3 ≤ 100,000 x1 + x2 + x3 ≤ 3 x1 ≤ 0.4(120x1 + 62x2 + 18x3) x2 ≤ 0.4(120x1 + 62x2 + 18x3) x3 ≤ 0.4(120x1 + 62x2 + 18x3) x1 ≥ 83.33

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