QNT2020 Project 2
Asset Allocation Problem
Due: 05/14/2023 11:59PM
Investment advisory firms offer investment advice and provide their clients with the best
mix of financial assets to invest in with different risk tol
erance levels. Assume that you work fo
XYZ investment advisory firm that uses an asset allocation model to recommend the portion of
each client's portfolio to be invested in three nds, Alpha, Bravo, and Charlie. Table 1 shows
XYZ's general guidelines of the minimum and esaximum percentage
e of the total portfolio value
invested in these three funds. For example, if a client has $100,000 to invest, the amount of
Alpha fund in the portfolio will be between $20,000 to $40,000 ($100,000*20% to
$100,000*40%.) In addition, XYZ attempts to assess the risk tolerance of each client and adjust
the portfolio to meet the needs of the individual investor.
Table 1. Min/Max percentage of the total portfolio
| Minimum Percentage Invested
| Maximum Percentage Invested
20% | 45%
Bravo 15%
| | 50%
Now you have a new client Mr. Smith who has $800,000 to invest. Based on an evaluation
of Mr. Smith's risk tolerance, you assign a maximum risk index of 0.05 for him. Table 2 shows
the individual risk rating of the funds based on XYZ's risk indicators. An overall portfolio risk
index is computed as a weighted average of the risk rating for the three funds, where the
weights are the fraction of the client’s portfolio invested in each of the funds. Additionally,
annual yields forecasted by XYZ are also shown in Table 2. Based on the information provided,
how should Mr. Smith be advised to allocate the $800,000 among Alpha, Bravo, and Charlie
funds? What is the annual yield yoy anticipate for the investment recommendation?
Table 2. Risk ratings and yields of the funds
LL _ RiskRating Annual Yields
Tn Ti 18%
Charlie ||| o.om
He TT T
Je
You are asked to develop a linear programming model that will provide the maximum yield
for the portfolio. Create a spreadsheet model to develop an optimal feasible solution of the
investment portfolio to present to Mr. Smith. Write up a report to recommend how much of
the $800,000 should be invested in each of the three funds and what the annual yield is
Additionally, use the model to do some analysis and answer the following questions:
1. Assume that Mr. Smith's risk index could be increased to 0.06. How much would the
yield increase, and how would the investment recommendation change?
2. Refer again to the original situation, in
phen Mr. Smith's risk index was assessed to be
0.05. How would your investment reccsymendation change if the annual yield for the
Alpha were revised downward to 17.5% or even to 16%?
Assume that the client expressed some concern about having too much money in the
Alpha. How would the original recommendation change if the amount invested Alpha is
not allowed to exceed the amount invested in Bravo?
Report Format
1. Please submit your project report in pdf format. Also submit your workshaats,
2. You can use the following outline for your project report:
a.
.
C.
d.
f.
. Additional Results: answer above add ition
Introduction: introduce the problem, provide some background
Problem Statement: describe the problem you are Proposing to solve,
State the assumptions (if any) i
Data Description: list the sources of data you expect to extract data fo
developing the analysis. Provide any references you used. Describe the data
(explain any terms that are specific to your dataset)
Methods: discuss your modelling approach and identify al ebiion vatiaplds,
What is the objective function? What is the. nature, of the objective function
(linear, non-linear, etc. )? What are your constraints? Whati is ‘the nature of you
constraints (linear, integer, binary)? What are your d cision
solver method did you adopt to develop the portfolio ficatment
ecommendation? ¢ THI
Results: discuss the outcome Honoris i mi! I
al. analysis questions.
Conclusion: Do you have a recomme ndation?,
Include tables and visuals/to support ny i TH
: Your projec reports should
tyour analysis (iF any),
SAP J 1
ill
[tmp
QNT2020 Project 2
Asset Allocation Problem
Due: 05/14/2023 11:59PM
Investment advisory firms offer investment advice and provide their clients with the best
mix of financial assets to invest in with different risk tol
erance levels. Assume that you work fo
XYZ investment advisory firm that uses an asset allocation model to recommend the portion of
each client's portfolio to be invested in three nds, Alpha, Bravo, and Charlie. Table 1 shows
XYZ's general guidelines of the minimum and esaximum percentage
e of the total portfolio value
invested in these three funds. For example, if a client has $100,000 to invest, the amount of
Alpha fund in the portfolio will be between $20,000 to $40,000 ($100,000*20% to
$100,000*40%.) In addition, XYZ attempts to assess the risk tolerance of each client and adjust
the portfolio to meet the needs of the individual investor.
Table 1. Min/Max percentage of the total portfolio
| Minimum Percentage Invested
| Maximum Percentage Invested
20% | 45%
Bravo 15%
| | 50%
Now you have a new client Mr. Smith who has $800,000 to invest. Based on an evaluation
of Mr. Smith's risk tolerance, you assign a maximum risk index of 0.05 for him. Table 2 shows
the individual risk rating of the funds based on XYZ's risk indicators. An overall portfolio risk
index is computed as a weighted average of the risk rating for the three funds, where the
weights are the fraction of the client’s portfolio invested in each of the funds. Additionally,
annual yields forecasted by XYZ are also shown in Table 2. Based on the information provided,
how should Mr. Smith be advised to allocate the $800,000 among Alpha, Bravo, and Charlie
funds? What is the annual yield yoy anticipate for the investment recommendation?
Table 2. Risk ratings and yields of the funds
LL _ RiskRating Annual Yields
Tn Ti 18%
Charlie ||| o.om
He TT T
Je
You are asked to develop a linear programming model that will provide the maximum yield
for the portfolio. Create a spreadsheet model to develop an optimal feasible solution of the
investment portfolio to present to Mr. Smith. Write up a report to recommend how much of
the $800,000 should be invested in each of the three funds and what the annual yield is
Additionally, use the model to do some analysis and answer the following questions:
1. Assume that Mr. Smith's risk index could be increased to 0.06. How much would the
yield increase, and how would the investment recommendation change?
2. Refer again to the original situation, in
phen Mr. Smith's risk index was assessed to be
0.05. How would your investment reccsymendation change if the annual yield for the
Alpha were revised downward to 17.5% or even to 16%?
Assume that the client expressed some concern about having too much money in the
Alpha. How would the original recommendation change if the amount invested Alpha is
not allowed to exceed the amount invested in Bravo?
Report Format
1. Please submit your project report in pdf format. Also submit your workshaats,
2. You can use the following outline for your project report:
a.
.
C.
d.
f.
. Additional Results: answer above add ition
Introduction: introduce the problem, provide some background
Problem Statement: describe the problem you are Proposing to solve,
State the assumptions (if any) i
Data Description: list the sources of data you expect to extract data fo
developing the analysis. Provide any references you used. Describe the data
(explain any terms that are specific to your dataset)
Methods: discuss your modelling approach and identify al ebiion vatiaplds,
What is the objective function? What is the. nature, of the objective function
(linear, non-linear, etc. )? What are your constraints? Whati is ‘the nature of you
constraints (linear, integer, binary)? What are your d cision
solver method did you adopt to develop the portfolio ficatment
ecommendation? ¢ THI
Results: discuss the outcome Honoris i mi! I
al. analysis questions.
Conclusion: Do you have a recomme ndation?,
Include tables and visuals/to support ny i TH
: Your projec reports should
tyour analysis (iF any),
SAP J 1
ill
[tmp