INVESTMENTS
Response to the following problem:
Carol Klein has $10,000 she wishes to invest in a particular stock and a bond. The stock has the potential to earn a 15 % annual return whereas the bond will yield only a 6% annual return. However, due to the volatility in the stock market, she wishes to invest no more than $5000 in the stock.
a. Determine Carol's optimal allocation of the $10,000 between the stock and the bond and her maximum potential return if:
i. There are no other restrictions on her investment decisions
ii. Carol must purchase whole shares of the stock at $165 per share. Note: Solver may incorrectly state that this problem is infeasible; but the solution it generates is feasible and optimal.
iii. Carol must purchase whole shares of the stock at $165 per share and the bond must be purchased in multiples of $100 each.
b. Discuss why each of the above scenarios yielded 'a different optimal solution and why the maximum potential return was lower in case (ii) than in case (i) and lower still in case (iii).