Chapter 8. Finance Applications. Refer to the PI Mortgages Example in the book about a firm that provides mortgages to finance various investments. Now imagine that just like PI Mortgages, a small start up investment company called SmartInc has $1.5 million to invest. There are five categories of loans, each with an associated return and risk ranging from 1 to 10, with 1 being the best, and the risk ratings are similar to what we saw in the PI Mortgage Example. However, the Rates of Return are different in this new market. Just like PIM, if they have any uninvested money left over, the money is placed in a savings account with no risk and a 1.5% rate of return. The information available is placed in the table here: Loan/Investment Return Risk First Mortgages 4% 4 Second Mortgages 8% 6 Personal Loans 8% 9 Commercial Loans 6% 3 Govt. Securities 2% 1 Savings 1.5% 0
Chapter 8. Finance Applications. Refer to the PI Mortgages Example in the book about a firm that provides mortgages to finance various investments. Now imagine that just like PI Mortgages, a small start up investment company called SmartInc has $1.5 million to invest. There are five categories of loans, each with an associated return and risk ranging from 1 to 10, with 1 being the best, and the risk ratings are similar to what we saw in the PI Mortgage Example. However, the
|
Loan/Investment |
Return |
Risk |
|
First Mortgages |
4% |
4 |
|
Second Mortgages |
8% |
6 |
|
Personal Loans |
8% |
9 |
|
Commercial Loans |
6% |
3 |
|
Govt. Securities |
2% |
1 |
|
Savings |
1.5% |
0 |
The goal for the mortgage team at SmartInc is to allocate the money to the categories based upon the constraints placed by the Board regarding how to spend the $1.5 million:
- Maximize the average return per dollar
- The average risk of the portfolio should not be more than 5 (not including the savings account)
- At the most 20% of the investment (not counting savings account) should be made in commercial loans (NOTICE: this is a big change from the textbook example)
- The amount invested in second mortgages and personal loans combined should not be higher than the amount invested in first mortgages.
- At least 5% of the total budget has to be invested in Government Securities.
Based on this information, give the following answers after creating a LP and analyzing it using the Solver in Excel:
- The Maximum value of Returns for SmartInc based on your recommendations within the given constraints would be = $ and the Net Rate of return is ____________ %.
- Fill in the following table to indicate the amount of money to be invested in each type of investment (you can use whole numbers, no decimals or $ signs required).
|
Investment |
Amount ($) |
|
First Mortgages |
|
|
Second Mortgages |
|
|
Personal Loans |
|
|
Commercial Loans |
|
|
Govt. Securities |
|
|
Savings |
|
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