# Problem 7-20 - PowerPoint PPT Presentation

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Problem 7-20. Texas lotto winner has decided to invest \$50,000 a year in the stock market. Stocks for consideration are a petrochemical firm and a public utility. Risk index is assigned to each of the stocks: Petrochemical = 9 Utility = 4

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Problem 7-20

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### Problem 7-20

• Texas lotto winner has decided to invest \$50,000 a year in the stock market.

• Stocks for consideration are a petrochemical firm and a public utility.

• Risk index is assigned to each of the stocks:

Petrochemical = 9

Utility = 4

• Maximize the return, but the average risk index should not be higher than 6.

• Estimated Returns:

Petrochemical = 12%

Utility = 6%

Kelly Devilbiss - Problem 7-20

### Solve for:

• How much should be invested for each stock?

• What is the average risk for this investment?

• What is the estimated return for this investment?

Kelly Devilbiss - Problem 7-20

### QM for Windows

P = Petrochemical / U = Utility

Maximize: Estimated % return for each stock

Total Investment: 1P + 1U = \$50,000

Risk Index: 9P + 4U ≤ \$300,000 because the average risk index should not be higher than 6.

(9P + 4U)/\$50,000 ≤ 6 [\$50,000 x 6 = \$300,000]

Estimated Return: .12P + .06U ≤ \$6,000

[\$6,000 would be the maximum return possible]

Kelly Devilbiss - Problem 7-20

### QM for Windows - Solve

How much should be invested in each stock?

Petrochemical = \$20,000

Utility = \$30,000

What is the estimated return for this investment?

\$4,200

Kelly Devilbiss - Problem 7-20

Kelly Devilbiss - Problem 7-20

### What is the average risk for this investment?

9P + 4U / \$50,000 = average risk

9(20,000) + 4(30,000) / 50,000

= 180,000 + 120,000 / 50,000

= 300,000 / 50,000

= 6

Average risk = 6

Kelly Devilbiss - Problem 7-20