You are the manager of a £100 million portfolio, and you have 6 investment options: • First Mortgages: return 9% and risk score 3 Second Mortgages: return 12% and risk score 6 Personal Loans: return 15% and risk score 8 Commercial Loans: return 8% and risk score 2 Government Securities: return 6% and risk score 1 Saving Account: return 3% and risk score 0 The current regulation requires that the amount allocated in second mortgages and personal loans (combined) should not exceed the amount allocated in first mortgages. Given this information: 1. Ignoring the risk involved in the different investment options, what is the profit maximizing allocation of resources? What are the expected profits? 2. Now, you have to consider the risk associated with the investments. The average risk of your portfolio cannot exceed 5. What is the profit maximizing allocation of resources? What are the expected profits? The average risk is computed as follows: Av=krixi xi where: xi is the amount allocated in the investment option i and ri is the risk score of investment option i. 3. A new legislation is approved, now at least 20% of the money allocated in risky investments (risk score greater than zero) should be allocated in commercial loans. How does the new legislation change your optimal allocation? What is the new expected profit?
You are the manager of a £100 million portfolio, and you have 6 investment options: • First Mortgages: return 9% and risk score 3 Second Mortgages: return 12% and risk score 6 Personal Loans: return 15% and risk score 8 Commercial Loans: return 8% and risk score 2 Government Securities: return 6% and risk score 1 Saving Account: return 3% and risk score 0 The current regulation requires that the amount allocated in second mortgages and personal loans (combined) should not exceed the amount allocated in first mortgages. Given this information: 1. Ignoring the risk involved in the different investment options, what is the profit maximizing allocation of resources? What are the expected profits? 2. Now, you have to consider the risk associated with the investments. The average risk of your portfolio cannot exceed 5. What is the profit maximizing allocation of resources? What are the expected profits? The average risk is computed as follows: Av=krixi xi where: xi is the amount allocated in the investment option i and ri is the risk score of investment option i. 3. A new legislation is approved, now at least 20% of the money allocated in risky investments (risk score greater than zero) should be allocated in commercial loans. How does the new legislation change your optimal allocation? What is the new expected profit?
Database System Concepts
7th Edition
ISBN:9780078022159
Author:Abraham Silberschatz Professor, Henry F. Korth, S. Sudarshan
Publisher:Abraham Silberschatz Professor, Henry F. Korth, S. Sudarshan
Chapter1: Introduction
Section: Chapter Questions
Problem 1PE
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Transcribed Image Text:You are the manager of a £100 million portfolio, and you have 6 investment options:
First Mortgages: return 9% and risk score 3
Second Mortgages: return 12% and risk score 6
Personal Loans: return 15% and risk score 8
Commercial Loans: return 8% and risk score 2
Government Securities: return 6% and risk score 1
Saving Account: return 3% and risk score 0
The current regulation requires that the amount allocated in second mortgages and personal
loans (combined) should not exceed the amount allocated in first mortgages.
Given this information:
1. Ignoring the risk involved in the different investment options, what is the profit
maximizing allocation of resources? What are the expected profits?
2.
Now, you have to consider the risk associated with the investments. The average risk of
your portfolio cannot exceed 5. What is the profit maximizing allocation of resources?
What are the expected profits?
The average risk is computed as follows:
Av=Ekrixi
Xi
where: xi is the amount allocated in the investment option i and ri is the risk score of
investment option i.
3. A new legislation is approved, now at least 20% of the money allocated in risky
investments (risk score greater than zero) should be allocated in commercial loans. How
does the new legislation change your optimal allocation? What is the new expected
profit?
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