Practical Management Science
6th Edition
ISBN: 9781337406659
Author: WINSTON, Wayne L.
Publisher: Cengage,
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Chapter 4, Problem 56P
Summary Introduction
To determine: The way Company SX can maximize the expected
Linear programming:
It is a mathematical modeling procedure where a linear function is maximized or minimized subject to certain constraints. This method is widely useful in making a quantitative analysis which is essential for making important business decisions.
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You are also given the following table of average returns over the last 50 years:
Stocks
T-Bonds
T-Bills
Arithmetic
Geometric
Arithmetic
Geometric
Arithmetic
Geometric
0.118
0.107
0.064
0.058
0.041
0.039
If you were asked to compute the equity risk premium for Steel Products, using the historical
approach, what would your best estimate be?
The largest investor in Steel Products is the owner/founder who owns 20% of the stock. Is she also the
marginal investor in this stock? If your answer is yes write 1 and if your answer is No write 2 in the box.
Use excel for this problem
A trust officer at the Blacksburg National Bank needs to determine how to invest $150,000 in the following collection of bonds to maximize the annual return.
Bond
Annual Return
Maturity
Risk
Tax
Free
A
9.5%
Long
High
Yes
B
8.0%
Short
Low
Yes
C
9.0%
Long
Low
No
D
9.0%
Long
High
Yes
E
9.0%
Short
High
No
The officer wants to invest at least 40% of the money in short-term issues and no more than 20% in high-risk issues. At least 25% of the funds should go in tax-free investments, and at least 45% of the total annual return should be tax free.
Formulate the LP model for this problem.
Create the spreadsheet model and use Solver to solve the problem.
Suppose that you want to invest $10,000 in the stock market by buying shares in one of two companies: A and B. Shares in company A though risky, could yield a 50% return on investment during the next year. If the stock market if conditions are not favorable (bear market) the stock may lose 20% of it value. Company B provides safe investments with 15% return in a bull market and only 5% in a bear market Ali the applications you have consulted are predicting a 60% chance for a bull market and 40% for a bear market. Where you invest your money? Construct a decision tree.
Chapter 4 Solutions
Practical Management Science
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