isom 201 homework 3 chapter7

Chapter 7 Homework 3

Banks, investment funds, and insurance companies often have to select specific investments from a variety of alternatives. Overall objective is generally to maximize the potential return on the investment given a set of legal, policy, or risk restraints.

Steve City Trust (SCT) invests in short-term trade credits, corporate bonds, gold stocks, and construction loans. The board of directors has placed limits on how much can be invested in each area.

Investment

Interest Earned (%)

Max Investment

($ Millions)

Trade credit

7

1.0

Corporate bonds

11

2.5

Gold stocks

19

1.5

Construction loans

15

1.8

SCT has $5 million to invest and wants to accomplish two goals:

– Maximize the return on investment over the next six months

– Satisfy the diversification requirements set by the board

The board has also decided that at least 55% of the funds must be invested in gold stocks and construction loans and no less than 15% be invested in trade credit

The Solved problem should illustrate SCT should invest how much in each of the investments tools to accomplished the goals.