PORTFOLIO SELECTION

Welte Mutual Funds Inc., located in New York has obtained $100,000 by
converting industrial bonds to cash and is now looking for other investment
opportunities for these funds. Based on Welte’s current investments the firm’s
top financial analyst recommends that all new investments be made in the oil
industry, steel industry or in government bonds. The analyst has specifically
identified five investment opportunities and projected their annual rates of
return.
The management of Welte has imposed the following investment guidelines:
1. Neither industry should receive more than $50,000
2. Government bonds should be at least 25% of the steel industry
investment
3. The investment in Pacific Oil, the high return but high risk investments,
cannot be more than 60% of the total oil industry investment

Investment opportunities for Welte Mutual Funds

Investment Projected Rate of Return (%)

Atlantic Oil 7.3
Pacific Oil 10.3
Midwest Steel 6.4
Huber Steel 7.5
Government Bonds 4.5

Q: What portfolio recommendations-investments and amounts –should be

made for the available $100,000?
OBJECTIVE
To maximise the total return for the portfolio using the projected rates given
in the table
FORMULATION & TECHNIQUES USED
We can use the Linear Programming (LPP) model to solve the given case.
Decision Variables
The Decision variables used are
Let,
X1- Amount invested in Atlantic Oil
X2- Amount invested in Pacific Oil
X3- Amount invested in Midwest Steel
X4- Amount invested in Huber Steel
X5- Amount invested in Government bonds

The Objective Function

Z = 0.073X1+0.103X2+0.064X3+0.075X4+0.045X5
The Constraints
1. X1+X2+X3+X4+X5 = 100,000
Constraint specifies available investment is $100,000
2. X1+X2 <= 50,000
3. X3+X4 <= 50,000
Constraints specify that neither oil or steel industry should receive more
than $50,000

4. X5 >= 0.25(X3+X4)
Government bonds must at least be 25% of steel industry investment
 5. X2 <= 0.60(X1+X2)

Pacific oil cannot be more than 60% of the total oil industry investment

Now we solve based on the objective functions and constraints for getting the
optimal solution

SOLUTION

The maximum return is $8000

Therefore the optimum solution for getting maximum return for the portfolio is

Name Amount Invested

Atlantic Oil 20,000
Pacific Oil 30,000
Midwest Steel 0
Huber Steel 40,000
Government Bonds 10,000
We find that X3=0, and reduce cost is equal to 0.011. So taking this into
account when we adjust the value of the co-efficient of X3 in the objective
function, the profit becomes $8040. Hence it would be advisable to invest in
Midwest Steel if the rate of return was more.

Now there is a surplus of 10000 in the case of X3,this can be sold off to get
more profit.