J.D Williams, Inc.

Case Problem 2: Investment Strategy

Case Summary

1. J.D. Williams, Inc. is an investment advisory firm with more than $120 million funds
a. Uses an asset allocation model to advise clients how much money should be
invested in a growth stock fund, income fund, and a money market fund
2. 3 fund options:
a. Growth stock fund
i. Amount invested should be between 20% and 40% of total portfolio value
b. Income fund
i. Between 20% and 50% of total portfolio value
c. Money market fund
i. At least 30% of total portfolio value
3. Financial approaches of advising clients
a. Asset allocation model- provides clients a strategy to earn optimal profit
b. Percentage limitations- J. D. Williams recommends each client to have a diverse
portfolio therefore, the clients are advised with percentage limitations
c. Risk tolerance analysis- an analysis of each individual client’s risk tolerance is
also taken into account
4. Risk assessment for each client
a. Portfolio risk index= weighted average of the risk rating of the three funds
5. Forecasted annual yields for new client with $800,000:
a. Growth fund: 18%
b. Income fund: 12.5%
c. Money market fund: 7.5%
 Linear Programming Models
Model 1 (With 0.05 as Maximum Risk Index)

Decision Variables
Let GF = dollar amount of investment in growth stock fund
IF = dollar amount of investment in income fund
MMF = dollar amount of investment in money market fund

Objective Function:
Max 0.18GF + 0.125 +0.075MMF

Constraints:
Original Constraints:
Subject to:
GF ≥ (GF + IF + MMF) 20% Growth Fund Lower Bound
GF ≤ (GF + IF + MMF) 40% Growth Fund Upper Bound
IF ≥ (GF + IF + MMF) 20% Income Fund Lower Bound
IF ≤ (GF + IF + MMF) 50% Income Fund Upper Bound
MMF ≥ (GF + IF + MMF) 30% Money Market Lower Bound
GF + IF + MMF ≤ 800,000 Total Portfolio Value Limitation
0.1GF + 0.07 IF + 0.01 MMF ≤ 0.05 (GF + IF + MMF) Maximum Risk Index
GF, IF, MMF ≥ 0 Non-negative

Standardised Constraints:
Subject to:
0.8 GF - 0.2 IF - 0.2 MMF ≥ 0 Growth Fund Lower Bound
0.6 GF - 0.4 IF - 0.4 MMF ≤ 0 Growth Fund Upper Bound
-0.2 GF +.08 IF -0.2 MMF ≥ 0 Income Fund Lower Bound
-0.5 GF + 0.5 IF - 0.5 MMF ≤ 0 Income Fund Upper Bound
-0.3 GF - 0.3 IF + 0.7 MMF ≥ 0 Money Market Lower Bound
0.05 GF +.02 IF - 0.04 MMF ≤ 0 Maximum Risk Index
GF, IF, MMF ≥ 0 Non-negative

1
Max Annual yield = $94133.33, at point GF = $248888.89, IF = $160000 and MMF =
$391111.11
When invest in Growth Fund $248888.89, in Income Fund $160000 and in Money Market
Fund $39111.11 yields a maximum annual yield of $94133.33.

2
Model 2 (With 0.055 as Maximum Risk Index)

Decision Variables
Let GF = dollar amount of investment in growth stock fund
IF = dollar amount of investment in income fund
MMF = dollar amount of investment in money market fund

Objective Function:
Max 0.18GF + 0.125 +0.075MMF

Constraints:
Subject to:
0.8 GF - 0.2 IF - 0.2 MMF ≥ 0 Growth Fund Lower Bound
0.6 GF - 0.4 IF - 0.4 MMF ≤ 0 Growth Fund Upper Bound
-0.2 GF +.08 IF -0.2 MMF ≥ 0 Income Fund Lower Bound
-0.5 GF + 0.5 IF - 0.5 MMF ≤ 0 Income Fund Upper Bound
-0.3 GF - 0.3 IF + 0.7 MMF ≥ 0 Money Market Lower Bound
0.045 GF + 0.015 IF - 0.045 MMF ≤ 0 Maximum Risk Index
GF, IF, MMF ≥ 0 Non-negative

When the client’s risk index increase to 0.055, Max Annual yield = $98800, at point GF =
$293333.33, IF = $160000 and MMF = $346666.67
When invest in Growth Fund $293333.33, in Income Fund $160000 and in Money Market
Fund $346666.67 yields a maximum annual yield of $98800.

3
Model 3 (With adjusted objective function, for Managerial Report, question 3)

Decision Variables:
Let GF = dollar amount of investment in growth stock fund
IF = dollar amount of investment in income fund
MMF = dollar amount of investment in money market fund

Objective Function:
Max 0.14GF + 0.125 +0.075MMF

Constraints:
Subject to:
0.8 GF - 0.2 IF - 0.2 MMF ≥ 0 Growth Fund Lower Bound
0.6 GF - 0.4 IF - 0.4 MMF ≤ 0 Growth Fund Upper Bound
-0.2 GF +.08 IF -0.2 MMF ≥ 0 Income Fund Lower Bound
-0.5 GF + 0.5 IF - 0.5 MMF ≤ 0 Income Fund Upper Bound
-0.3 GF - 0.3 IF + 0.7 MMF ≥ 0 Money Market Lower Bound
0.05 GF +.02 IF - 0.04 MMF ≤ 0 Maximum Risk Index

GF, IF, MMF ≥ 0 Non-negative

4
When annual yield for the growth fund increases to 16%, we still recommend the client to
invest $248888.89 in Growth Fund, $160000 in Income Fund and $39111.11 in Money
Market Fund.

5
Model 4 (With extra constraint that GF <= IF), for Question 4

Decision Variables:
Let GF = dollar amount of investment in growth stock fund
IF = dollar amount of investment in income fund
MMF = dollar amount of investment in money market fund

Objective Function:
Max 0.18GF + 0.125 +0.075MMF

Constraints:
Subject to:
0.8 GF - 0.2 IF - 0.2 MMF ≥ 0 Growth Fund Lower Bound
0.6 GF - 0.4 IF - 0.4 MMF ≤ 0 Growth Fund Upper Bound
-0.2 GF +.08 IF -0.2 MMF ≥ 0 Income Fund Lower Bound
-0.5 GF + 0.5 IF - 0.5 MMF ≤ 0 Income Fund Upper Bound
-0.3 GF - 0.3 IF + 0.7 MMF ≥ 0 Money Market Lower Bound
0.05 GF +.02 IF - 0.04 MMF ≤ 0 Maximum Risk Index
GF - IF ≤ 0 Extra Limitaiton for Growth Fund
GF, IF, MMF ≥ 0 Non-negative

Max Annual yield = $93066.67, at point GF = $213333.33, IF = $213333.33 and MMF =

$373333.33. When investment in Growth Fund is $213333.33, in Income Fund $213333.33
and in Money Market Fund $373333.33 yields a maximum annual yield of $93066.67.

6
 Slack & General Solution
Model 1 for Problem 1 (With 0.05 as Maximum Risk Index)

Slack Analysis

General Solution
Max 0.18GF + 0.125 +0.075MMF

Subject to:
0.8 GF - 0.2 IF - 0.2 MMF- S1 = 0
0.6 GF - 0.4 IF - 0.4 MMF +S2 = 0
-0.2 GF +.08 IF -0.2 MMF - S3 = 0
-0.5 GF + 0.5 IF - 0.5 MMF +S4 = 0
-0.3 GF - 0.3 IF + 0.7 MMF - S5 = 0
0.05 GF +.02 IF - 0.04 MMF + S6 = 0
GF, IF, MMF ≥ 0

7
 Sensitivity Report
Model 1 for Problem 1 (With 0.05 as Maximum Risk Index)

Sensitivity Report Analysis:

1. Coefficient of objective function

① The objective function coefficient for GF is 0.18, with an allowable increase
of 1E+30
and an allowable decrease of 0.03. Therefore, as long as the profit
contribution associated
with 0.18 is between 0.18 - 0.03 = 0.15 and 0.18+ (1E+30) = ∞ , the
optimal solution of invest in Growth Fund $248888.89, in Income Fund
$160000 and in Money Market Fund $39111.11 will not change.

② The objective function coefficient for IF is 0.125, with an allowable increase

of 0.02
and an allowable decrease of 0.5883. Therefore, as long as the profit
contribution associated
with 0.18 is between 0.125 - 0.5883 = - 0.4633 and 0.125 + 0.02 = 0.145 ,

8
the optimal solution of invest in Growth Fund $248888.89, in Income Fund
$160000 and in Money Market Fund $39111.11 will not change.

③ The objective function coefficient for MMF is 0.075, with an allowable

increase of 0.105
and an allowable decrease of 0.06. Therefore, as long as the profit
contribution associated
with 0.18 is between 0.075 - 0.06 = 0.015 and 0.075 + 0.105 = 0.18 , the
optimal solution of invest in Growth Fund $248888.89, in Income Fund
$160000 and in Money Market Fund $39111.11 will not change.

2. Resources on RHS (Shadow Price)

① The shadow price for the Maximum Risk Index constraint is 0.1667. In
other words, if we increase the right-hand side of the Maximum Risk Index
constraint by 1, the value of the optimal solution (Annual yield) will increase
by $ 0.1667. Conversely, if we decrease the right-hand side of the Total
Portfolio Value constraint by 1, the value of the optimal solution will decrease
by $ 0.1667.

② The shadow price for the Total Portfolio Value constraint is 0.1177. In other
words, if we increase the right-hand side of the Total Portfolio Value
constraint by $ 1, the value of the optimal solution (Annual yield) will
increase by $ 0.1177. Conversely, if we decrease the right-hand side of the
Total Portfolio Value constraint by $ 1, the value of the optimal solution will
decrease by $ 0.1177.

③The shadow price for the Income Fund Lower bound constraint is -0.02. In
other words, if we increase the right-hand side of the Income Fund Lower
bound constraint by 1, the value of the optimal solution (Annual yield) will
decrease by $ 0.02. Conversely, if we decrease the right-hand side of the
Income Fund Lower bound constraint by 1, the value of the optimal solution
will increase by $ 0.02.

9
 Managerial Report

Question 1
Recommend how much of the $800,000 should be invested in each of the three funds. What
is the annual yield you anticipate for the investment recommendation?

A. The optimal portfolio allocation J.D. Williams that we recommend is as follows:

Growth Fund = $248,889
Income Fund = $160,00
Money Market Fund = $391,111
Total = $800,000

B. The anticipated annual yield:

Growth Fund = $248,889 X .18 = $44,800
Income Fund = $160,000 X .125 = $20,000
Money Market Fund = $391,111 X .075 = $29,333
Total = $94,133
The total anticipated annual yield = $94,133 / $800,000 = 11.77%

Question 2
Assume that the client’s risk index could be increased to 0.055. How much would the yield
increase, and how would the investment recommendation change?

When we increase the client risk index from .05 to .005 then the annual yield investment also
increases by $4,667 making the total annual yield increase 94,133+4,667= 98,800.

A. Modified Fund Allocation with an increased risk index

Growth Fund = $293,333
Income Fund = $160,000
Money Market Fund = $346,667
Total = $800,000

B. Increased Risk Index Projected Annual Yield

Growth Fund = $293,333 X .18 = $52,800
Income Fund = $160,000 X .125 = $20,000
Money Market Fund = $346,667 X .075 = $26,000
Total = $98,800
The total anticipated annual yield = $98,800 / $800,000 = 12.35%
Question 3

10
Refer again to the original situation, where the client’s risk index was assessed to be 0.05.
How would your investment recommendation change if the annual yield for the growth
fund were revised downward to 16% or even to 14%?

A. If the annual yield for growth fund increases by 2% to 16% but maintaining everything else
constant, the only change that we would see is the allocation to the GF in the objective function.
Below, we have outlined the new objective function along with its corresponding sensitivity
report to see whether or not our recommendation would change if the annual yield were changed.

New Objective Function with 16%:

Max 0.16GF + 0.125 +0.075MMF

Based on Sensitivity Report of Model 1 (as above figure), the objective

function coefficient for GF is 0.18, with an allowable increase of 1E+30 and
an allowable decrease of 0.03. Therefore, as long as the profit contribution
associated with 0.18 is between 0.18 - 0.03 = 0.15 and 0.18+ (1E+30) =
∞ , the optimal solution of invest in Growth Fund $248888.89, in Income
Fund $160000 and in Money Market Fund $39111.11 will not change.

The current recommendation of investment allocation in the growth fund is based on the fund’s
given range (from 15% to infinity, as discussed above). This range states that any possible index

11
increase of this fund, i.e., 16% and higher, would not impact the portfolio's asset allocation but, it
would positively affect the objective function's total annual yield value to be greater than the
original projected value of $94,133. So as long as our annual yield for growth fund is kept within
the optimal range (15% and greater, we have a potential for a greater annual yield).

When annual yield for the growth fund increases to 16%, we still recommend the client to invest
$248888.89 in Growth Fund, $160000 in Income Fund and $39111.11 in Money Market Fund.

B. When Growth Fund annual yield is 14%: change the coefficient of GF to 0.14 in objective
function

New Objective Function with 14%:

Max 0.14GF + 0.125 +0.075MMF

Because 0.14 excess the maximum objective coefficient allowable decrease, which is 0.15. We
built a new model (model 3) outlined previously.
Below
find the
excel
solver
output
for

reference-

When annual yield for the growth fund decreases to 14%, we recommend to invest $160000 in
Growth Fund, $293333.33 in Income Fund and $346666.67 in Money Market Fund.

12
Question 4.
Assume that the client expressed some concern about having too much money in
the growth fund. How would the original recommendation change if the amount
invested in the growth fund is not allowed to exceed the amount invested in the
income fund?

The current optimal solution for J.D Williams, inc. shows that the income funds are less than the
amount of money invested on growth funds 24,8889 compared to 160,000. This question also
not allowing the amount invested on growth funds to exceed the amount invested on income
funds. In order to add this new requirement, we will have to add a new constraint to the equation.

We outlined this is Model 4 previously in our report. Based on the excel output, we can max the
Annual yield to $93066.67 when investment in the Growth Fund is $213333.33, in Income Fund
is $213333.33 and in the Money Market Fund is $373333.33.

Question 5
The asset allocation model you developed may be useful in modifying the portfolios
for all of the firm’s clients whenever the anticipated yields for the three funds are
periodically revised. What is your recommendation as to whether use of this model
is possible?

We recommend that J.D. Williams only uses this model to those potential new clients that meet
the criteria, similar to the objectives and constraints. J.D. Williams mission, is to provide the
upmost professional and financial advisement that best meets the investor’s needs. Based upon
our outcomes, we do not recommend that J.D. Williams uses this model as a guide to their clients
financial investments.

13
 Conclusion

Upon analyzing J. D. Williams Inc.’s current client with $800,000 to invest and various
forecasted annual yields, we came to the conclusion that the client can have an annual yield of
$94,133.33 if it invests $248,888.89 into the Growth Fund, $160000 in the Income Fund, and
$39111.11 in the Money Market Fund using a 0.05 maximum risk factor. If the client is
interested in increasing their risk index to 0.055, their annual yield would decrease to $98,800
with $293,333.33 in the Growth Fund, $160,000 in the Income Fund and $346,666.67 in the
Money Market Fund. If the client is worried about having too much money in the growth fund
and wants to add a constraint in which the amount invested in the growth fund cannot be greater
than that invested in the income fund, the client can maximize their annual yield to $93066.67
when investment in the Growth Fund is $213333.33, in Income Fund is $213333.33 and in the
Money Market Fund is $373333.33. Although it would be easier for J. D. Williams Inc. to use
this similar report for their other clients, even if this model is used for clients with similar
objectives and constraints, the company’s mission is to provide unique financial services to each
of their clients.

14
 Reference

Anderson, Sweeney, Williams, Camm, Cochran, Fry & Ohlmann (2015). Quantitative

Methodsfor Business (13th ed.). Mason, Ohio: Cengage Learning.

15