BUSLYTC

INVESTMENT
STRATEGY
Candano, Lee, Lim, Zurbano
 ABOUT THE CASE
J.D. Williams, Inc., is an investment advisory firm
Williams just contracted with a new client who has
that manages more than $120 million in funds for its
$800,000 to invest. Williams assigned a maximum
numerous clients. The company uses an asset
risk index of 0.05 for the client. Additionally,
allocation model that recommends the portion of
Williams is currently forecasting annual yields of
each client’s portfolio to be invested in a growth
18% for the growth fund, 12.5% for the income fund,
stock fund, an income fund, and a money market
and 7.5% for the money market fund.
fund.
Williams must have to come up with a programming
General guidelines indicate that the amount
model that will provide the maximum yield for the
invested in the growth fund must be between 20%
portfolio, and have a managerial report to advise
and 40% of the total portfolio value, 20% and 50% of
and guide the client.
the total portfolio must be in the income fund, and
at least 30% of the total portfolio value must be in
the money market fund.
 GIVEN MAXIMUM RISK INDEX: 0.05

General Guidelines of Investments: RISK INDICATORS:

20%-40% : GROWTH FUND 0.10 : GROWTH FUND

20%-50% : INCOME FUND 0.07 : INCOME FUND

0.01 : MONEY MARKET FUND

30% : MONEY MARKET FUND

ANNUAL YIELDS FORECASTED:

CLIENT INFORMATION: 18% : GROWTH FUND

INVESTMENT: $800,000 12.5% : INCOME FUND

7.5% : MONEY MARKET FUND

INVESTMENT ALLOCATION
Subject to Constraints:

1 X1 + 1 X2 + 1 X3 ≤ 800000 available fund

Let X1 be growth fund 0.80 X1 -0.20 X2 -0.20 X3 ≥ 0 (requirement of X1 to be more

than 20%)
X2 be income fund
0.60 X1 -0.40 X2 -0.40 X3 ≤ 0 (requirement of X1 to be less
than 40%)
X3 be money fund
-0.20 X1 + 0.80 X2 -0.20 X3 ≥ 0 (requirement of X2 to be more
than 20%)

-0.50 X1 + 0.50 X2 -0.50 X3 ≤ 0 (requirement of X2 to be less

Objective Function: than 50%)

Maximize Z= 0.18 X1 + 0.125 X2 + 0.075 X3 -0.30 X1 -0.30 X2 + 0.70 X3 ≥ 0 (requirement of X3 to be less

than 30%)

0.05 X1 + 0.02 X2 -0.04 X3 ≤ 0 (requirement of overall risk

index to be not more than 0.05) X1, X2, X3 ≥ 0
1) The optimal portfolio allocation J.D. The anticipated annual yield is:
Williams recommends is as follows:
Growth Fund = $248,889 x 0.18 =
$44,800

Growth Fund = $248,889 Income Fund = $160,000 x

0.125= $20,000
Income Fund = $160,000
Money Market Fund = $391,111 x
Money Market Fund = $391,111 .075= $29,333
Total = $800,000
Total = $94,133

Total Anticipated Annual Yield = $

94,133/$800,000 = 11.77% ~ 11.8%
CONSTRAINTS
F
O
R
M
U
L
A
S
SENSITIVITY REPORT
2) When the client risk index The anticipated annual yield is:
increases to 0.055, Growth Fund = $293,333 x 0.18 = $52,800

Income Fund = $160,000 x 0.125= $20,000

Growth Fund = $293,333 Money Market Fund = $346,667 x .075=

$26,000
Income Fund = $160,000

Money Market Fund = $346,667 Total = $98,800

Total = $800,000 Total Anticipated Annual Yield = $ 98,800/

$800,000 = 12.35%
ADDITIONAL CONSTRAINT (QUESTION#3)

The amount invested in the growth fund is not The decrease of 0.2% in yield makes this portfolio
allowed to exceed the amount invested in the preferable.
income fund.
ADDITIONAL
CONSTRAINT
4) Assume that the client expressed some concern about having too much money in the
growth fund. How would the recommendation change if the amount invested in the
growth fund is not allowed to exceed the amount invested in the income fund?

As any financial expert would say is that any individual should obtain a proper balance
between risk and return. Given the risk indexes of .10 and .07 of the growth fund and
income fund, respectively, the client may opt to choose a less aggressive approach by
limiting the growth fund's investment amount to equal yet not surpass the amount
invested in the income fund. This change in investment strategy however would
generate a lower annual yield of $85,067 than the projected annual return of $94,133
by the original, a more risky recommendation.
RECOMMENDATION

In this case, J.D Williams should not recommend the use of this method for asset
allocation model as their general guide to financial investment because it does not
meet the individual investor’s needs.