1- Statement of the Problem:
Middle East for investment offers a bundle of investment options in many types of securities. Mr. Brown, an investor, would like to invest $ 5 million in various securities. He wishes to maximize his yearly profit over the next year. The investment company offered him a portfolio including Bonds, Stocks, Gold and Land. The expected return is 6% for Bonds, 14% for Stocks, 10% for Gold and 5% for Land. For diversification purposes, the maximum amount to be invested is $ 3 million in Bonds, $ 3 million in Stocks, $ 2 million in Gold and $ 1 million in Land. In addition to that, the investment company specifies that at least 40% of the total investment should be in Bonds and Stocks, and no more than 20% of the total investment should be in land.
The decision variables are:
B= Total Dollar amount to be invested in Bonds.
S= Total Dollar amount to be invested in Stocks.
G= Total Dollar Amount to be invested in Gold.
L= Total Dollar Amount to be invested in Land.
The objective function that maximizes the return per year is: Z= 0.06B+0.14S+0.1G+0.05L
→ -0.2B-0.2S-0.2G+0.8L ≤0
Given that B; S; G and L are positive values
3- POM-QM Output:
That is, Mr. Brown needs to invest $ 3 million in stocks and $ 2 million in Gold. The total return would be $ 620,000 and the total return on investment (ROI) would be: Total return/Total amount invested= 620,000/5,000,000= 12.4% The reduced cost for the amount invested in Bonds (B), which is at zero level, is 0.04 (4%). This means that the expected return on Bonds should increase by 4% (from 6% to 10%) in order for B to become non-zero.