Question

An investor has at most ​$80 comma 000 to invest in government​ bonds, mutual​ funds, and money market funds. The average yields for the government​ bonds, mutual​ funds, and money market funds are 8​%, 14​%, and 6​% respectively. The​ investor's policy requires that the total amount invested in mutual and money market funds not exceed the amount invested in government bonds.

How much should be invested in each type of investment in order to maximize the​ return?
What is the maximum return in the first​ year?

Answer 1

Answer:

• How much should be invested in each type of investment in order to maximize the​ return?

Invest        Value Invested  

Gov Bonds   $40,000  

Mutual F   $40,000  

Market F   -    

TOTAL     $80,000  

• What is the maximum return in the first​ year?

Invest       Expected Ret. Portfolio  

Gov Bonds  4,0%

Mutual F  7,0%

Market F  0,0%

TOTAL     11,0%

Explanation:

The investor's policy requires that the total amount invested in mutual and money market funds not exceed the amount invested in government bonds.

As Mutual Funds have the higher returns, it means that it's necessary to invest as much as we can in these financial instruments.

If there is no requirement of invest something in the market funds, then to maximize yield, the best option is to invest 50/50 between Government Bonds and Mutual Funds.