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Annabelle Invests in The Market

- Annabelle has $120,000 to invest between an index fund and internet stock fund. She wants to balance risk by investing at least 1/3 but no more than twice as much in the internet fund compared to the index fund. - The optimal solution is to invest $203,050 in the index fund and $406,090 in the internet fund, yielding a maximum profit of $29,691.42. - Increasing the total investment amount, even by $1, will increase profits by $0.25 since Annabelle's rate of return remains stable.

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Darwyn Mendoza
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5K views6 pages

Annabelle Invests in The Market

- Annabelle has $120,000 to invest between an index fund and internet stock fund. She wants to balance risk by investing at least 1/3 but no more than twice as much in the internet fund compared to the index fund. - The optimal solution is to invest $203,050 in the index fund and $406,090 in the internet fund, yielding a maximum profit of $29,691.42. - Increasing the total investment amount, even by $1, will increase profits by $0.25 since Annabelle's rate of return remains stable.

Uploaded by

Darwyn Mendoza
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Annabelle Invests in the Market

A Case Study Presented to the


Decision Sciences and Innovation Department
The Ramon V. Del Rosario College of Business
De La Salle University
In partial fulfillment
Of the requirements of the course
MANSCIE Section K32
SUBMITTED TO:
Dr. Emilina R. Sarreal
SUBMITTED BY:
Chua, Hazel Ann Y. R.
Gonzales, Raeanne Therese Q.
Mendoza, Darwyn Albert T.
Phillipneris, Anna Marie S.
Ramirez, Diana Marie M.
February 27, 2014

I. Brief Background of the Case

Annabelle Sizemore has paid some treasury bonds and a life insurance
policy that her parents had accumulated over the years for her. At the same
time, Annabelle has saved some money in certificates of deposit and savings
bonds since she graduated from college 10 years ago. As a result, she can
invest $120,000. Then she felt that she should invest the entire amount there,
given the recent rise in the stock market. Annabelle then decides on which is the
best stock market that she should invest in. She then chose an index fund from
Shield Securities and an Internet stock fund from Madison Funds, Inc. She has
also decided that the proportion of the dollar amount that she invests in the index
fund relative to the Internet fund should be at least one-third but she should not
invest more than twice the amount in the Internet fund that she invests in the
index fund. In short, she wants to balance her risk (of losing money) to some
degree.
II. Define the Problem
1. How much money should Annabelle invest in each fund?
2. What will be the effect in eliminating the constraint?
3. What will be the effect in eliminating the 2:1 constraint?
4. What can be said about her ROI strategy given that she invests $1 more? $2
more? $3 more?








III. Acquire Input Data

X
1
X
2
Symbol Right Hand
Side
175 208 = $120,000
> 0.33
< 2
Profit (Z) 29.75 58.24


IV. Develop the Model
Objective Function
Max Z (ROI) = (0.17)(175)x
1
+ (0.28)(208)x
2

Max Z (ROI) = 29.75x
1
+ 58.24x
2

where, x
1
= no. off shares of index fund,
x
2
= no. of shares of internet stock fund
subject to:
1) 175x
1
+ 208x
2
= $120,000
2) x
1
/x
2
> 0.33
3) x
2
/x
1
< 2
x
1,
x
2
> 0

V. Develop the Solution
5.1. Solve for the Constraints









5.2 Graph the Solution



5.3 Corner Point Solution
175x
1
+ 208(2x
1
) = 120,000
x
2
/x
1
< 2

x
2
= 2x
1

175x
1
+ 208(2x
1
) = 120,000
591x
1
= 120000
x
1
= 203.05

175x
1
+ 208x
2
= 120,000
175 (203.05) + 208x
2
= 120,000
208x
2
= 84,466.25
x
2
= 406.09
(x1, x2) (203, 406)
Max Z = 29.75x
1
+ 58.24x
2

29.75(203.05) + 58.24(406.09)
=29,691.42


5.1 Solve for the Constraints



5.2 Graph the Solution

5.3 Corner Point Solution
175x
1
+ 208x
2
= $120,000
x
1
/x
2
> 0.33

x
1
= 0.33
175(0.33) + 208x
2
= 120000
265.75x
2
= 120000
x
2
= 451.55

Max Z = 29.75x
1
+ 58.24x
2

29.75(0.33) + 58.24(451.55)
=26,308.09

VI. Analyze the Results
According to the data,
VII. Recommended Solution
Annabelle could add more dollars to her investments since the rate of
return is relatively stable. Her profit will get higher by $0.25 every time she adds
$1 to her investment.

VIII. Conclusion
The increasing the amount available to invest (e.g. $120,000 to $120,001)
will increase the profit from Max Z = $29,691.37 to Max Z = $29,691.62 or
approximately $0.25. Each $1 increase in investment is equivalent to a $0.25
expected return in overall profit. Also, the marginal value of an extra $1 that
Annabelle will invest is $0.25.

We can also conclude that Annabelles ROI is fairly good, because if the
markets are stable, every $1 will yield a $0.25 return in profit. This means that
her rate of return will get higher every time she adds a dollar to her investment.
This strategy is better compared to a profit deficit.

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