QUESTION 1 Catt Wilde has always been an optimistic decision-maker and considers a choice between investing in Stocks, C

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Question 1 Catt Wilde Has Always Been An Optimistic Decision Maker And Considers A Choice Between Investing In Stocks C 1 (100.8 KiB) Viewed 34 times

Question 1 Catt Wilde Has Always Been An Optimistic Decision Maker And Considers A Choice Between Investing In Stocks C 2 (62.57 KiB) Viewed 34 times

QUESTION 1 Catt Wilde has always been an optimistic decision-maker and considers a choice between investing in Stocks, CDs, Mutual Funds and Government Bonds for one year. Catt has just come into an inheritance from an uncle of $200,000 and has decided that she should take her chances with an investment opportunity with this newfound money. Catt is deciding whether to invest in one investment opportunity alone or create a portfolio that maximises her return. David Marks, a market advisor, is a friend of Catt with whom she reached out to seek advice on the best way she should invest this money. David has done an analysis and proceeds to provide Catt with the following information. If Catt invests in stocks and the market turns out to be good, she will get a return of 10%, however, if the market is fair, she will get a return of 7%, and if the market is poor, she will only get 2%. If Catt invests in CDs, the bank guarantees a return of 6%. David further advises Catt that if she invests in Mutual Funds and the market is good, she will get a return of 9%, however, is the market is fair, she will get 6%, and a poor market will profit her -5%. Finally, David's analysis on the Government Bonds market reveals that the bonds have floating rates and if the market is good, the bonds will return 6% if the market is fair, the bonds will return 8%, and if the market is poor, the bonds will return 4%. David's analysis measures a good market's probability as 0.4 and a fair and poor market at 0.3 each. Also, David makes a proposal to Catt that for an additional $3,500, he could provide her with certainty in her decision making. David further advises Catt that should she consider the investment portfolio to maximise her return, she should follow a few guidelines subject to her budgetary and suggested managerially imposed constraints: The investment in Stocks cannot exceed 10% of the total portfolio. . The investment in CDs should be at least 30% of the total portfolio. . The investment in Government Bonds relative to Mutual Funds should be at most 3 to 1. . The investment in Mutual Funds should be at least twice as much invested in CDs.
To help Catt Wilde determine the best possible course of action, please complete the following: i. Compute the Expected Monetary Value (EMV) or the Expected Opportunity Loss (EOL) and advise Catt which investment opportunity she should choose. (5 marks) ii. Show evidence to justify David's proposal. (2 marks) Formulate a linear programming problem for Catt's maximizing portfolio problem assuming that since the probability of a good market is higher, she will get those returns (10 marks) for each investment opportunity. iv. Catt Wilde should invest $20,000 in stocks, $60,000 in CDs and $120,000 in Mutual Funds from the linear programming solution. What is the average return on investment that Catt (3 marks) can expect?