1. The Heinlein and Krampf Brokerage firm has just been instructed by one of its clients to invest $250,000 of her money obtained recently through the sale of land holdings in Ohio. The client has a good deal of trust in the investment house, but she also has her own ideas about the distribution of the funds being invested. In particular, she requests that the firm select whatever stocks and bonds they believe are well rated, but within the following guidelines: (a) Municipal bonds should constitute at least 20% of the investment. (b) At least 40% of the funds should be placed in a combination of electronic firms, aerospace firms, and drug manufacturers. (c) No more than 50% of the amount invested in municipal bonds should be placed in a high-risk, high-yield nursing home stock. Subject to these restraints, the client’s goal is to maximize projected return on investments. The analysts at Heinlein and Krampf, aware of these guidelines, prepare the attached list of high-quality stocks and bonds and their corresponding rates of return. Hint: You will need to rearrange one of the constraints in this problem so that all variables will be at the left hand side of the constraint and the right hand side of the constraint will be zero. You may adjust he sign of the constraint accordingly. For example, rearranging x < y + 2 to x - y < 2.
The optimal money invested in the five stocks and bonds — Municipal bonds, Electronics, Aerospace, Drugs, and Nursing homes are __________ dollars, respectively.
A. 50,000, 50,000, 50,000, 50,000, 50,000
B. 50,000, 0, 0, 175,000, 25,000
C. 25,000, 0, 0, 175,000, 50,000
D. 50,000, 25,000, 25,000, 125,000, 25,000
2. If you think interest rates (bond YTMs) are going to go down, which would you most prefer to own?
a. 30 year maturity, zero coupon bond
b. 10 year maturity, zero-coupon bond
c. 30-year maturity, bond with 10% coupon rate
d. 10 year maturity, bond with 10% coupon rate.