Optimizing Investment Portfolio with Risk, Return, and Liquidity Constraints: A Linear Programming Approach

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Running Head:MAT540Week8Assignment1Optimizing Investment Portfolio with Risk, Return, and LiquidityConstraints: A Linear Programming ApproachMAT540Week8AssignmentName:Professor:As a portfolio manager for the XYZ investment fund, you have optimized the investmentdistribution across stocks, real estate, bonds, and certificates of deposit (CDs) based on returns,risks, and constraints. Given the various changes in investment conditions, such as additionalfunds being available and changes in stock yields, how would you modify your portfolioallocation to maximize returns while maintaining risk constraints? Explain your approach toadjusting the portfolio in response to these changes, and discuss the impact of these adjustmentson the portfolio's overall return.Word Count Requirement:600-800 words

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Running Head:MAT540Week8Assignment2ProblemYou are a portfolio manager for the XYZ investment fund. The objective for the fund is tomaximize your portfolio returns from the investments on four alternatives. The investmentsinclude (1) stocks, (2) real estate, (3) bonds, and (4) certificate of deposit (CD). Your totalinvestment portfolio is $1,000,000.Investment ReturnBased on the returns from the past five years, you concluded that the investment annual returnson stocks are 10%, on real estates are 7% onbonds are 4% and on CD is 1%.Risk ConstraintsHowever, you also have to analyze the risks associate with each investment category. A wildlyused risk measurement parameter is called Value at Risk (VaR). (Note: VaR measures the riskof loss on a specific portfolio of financial assets.) For example, given a million dollar stockinvestment, if a portfolio of stocks has a one-day 4% VaR, there is a 5% probability that thestock portfolio will fall in value by more than 1,000,000 * 0.004 = $4,000 over a one day period.In the portfolio, the VaR for stock investments is 6%. Similarly, the VaR for real estateinvestment is 2% and the VaR for bond investment is 1% and the VaR for investment in CD is0%. To manage the portfolio, you decided that at 5% probability, your VaR for stocks cannotexceed $25,000, VaR for real estate cannot exceed $15,000, VaR for bonds cannot exceed$2,500 and the VaR for CD investment is $0.Diversification and Liquidity Constraints

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