Question

Suppose you have $16,000 to invest in three stocks, A, B, and C. Stock A is a low-risk stock that has expected returns of 4%. Stock B is a medium-risk stock that has expected returns of 5%. Stock C is a high-risk stock that has expected returns of 6%. You want to invest at least $1,000 in each stock. To balance the risks, you decide to invest no more than $7,000 in stock C and to limit the amount invested in C to less than 4 times the amount invested in stock A. You also decide to invest less than twice as much in stock B as in stock A. How much should you invest in each stock to maximize your expected profit?

Answer 1

Answer:

Stock A: 1

Stock B: 1 and 2

Stock C: 1,7,4

Answer 2

To solve this problem, let us say that:

money invested in stock A = A

money invested in stock B = B

money invested in stock C = C

The given problem states that:

C = A * (1 / 4) = 0.25 A

B = A * (1 / 2) = 0.50 A

It was stated that we only have $16,000 to invest. Therefore:

A + B + C = 16,000

Substituting values of C and B in terms of A:

A + 0.50 A + 0.25 A = 16,000

1.75 A = 16,000

A = $9,142.86

So C and B is:

C = 0.25 (9142.86)
C = $2285.71

 

B = 0.50 (9142.86)

B = $4571.43