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.
