Abstract
Optimization techniques have been used in this paper to obtain an optimal investment in a selected portfolio that gives maximum returns with minimal inputs based on the secondary data supplied by a particular firm that is examined. Sensitivity analysis is done to ascertain the robustness of the resulting model towards the changes in input parameters to determine a redundant constraint using linear programming. The challenge of determining the available funds and allocating each component of the portfolio to maximize returns and minimize inputs by portfolio holders and managers who are the major decision-makers in allocating their resources cannot be quantified. This optimization technique is used to obtain an optimal investment portfolio including financial risks of a firm with disposable of $15,000,000.00 invested in crude oil, mortgage securities, cash crop, certificate of deposit, fixed deposit, treasury bills, and construction loans. The model is a single-objective model that maximizes the return on the portfolio as the interests on the original data reduces by 5%; then, the return on investments also reduced by almost 15%, with the quantum of money on treasury bills and construction loans posing a significant reduction for the maximum return. The investment in the other options saw a slight decrease. Also, as the interest rates of the original data increase by 5%, the return on investments also grows by almost 17% while the quantum of money on the treasury bills and construction loans increases, and the quantum of money on the other options experienced a decrease except for mortgage securities which recorded a slight increase.
Highlights
A portfolio is an individual or corporate investment that can be managed by financial professionals or financial institutions, such a portfolio may include financial assets, stocks, bonds, and cash held and/or managed by an individual investor
In this paper, we examine the level of investment in a selected portfolio that gives maximum returns with minimal input based on the secondary data supplied by a particular firm, which were used as the parameters for the proposed linear programming model
As the interest rate of the original data increases by 5%, the return on investment grows by almost 17% with the quantum of money on treasury bills and construction loans being the most affected in terms of increment, that is, increasing from $2,554,800.00 to $3,674,300.00 and from $2,407,320.00 to $3,155,800.00, respectively
Summary
A portfolio is an individual or corporate investment that can be managed by financial professionals or financial institutions, such a portfolio may include financial assets, stocks, bonds, and cash held and/or managed by an individual investor. It is designed according to the investor’s risk tolerance, time frame, and investment objectives. Papahristodoulou and Dotzauer [1] defined and discussed optimal as the best or most favorable among a set of alternatives and defined the optimal portfolio as the portfolio that considers the investor’s own “greed” and risk aversion. The challenge of portfolio optimization is an important aspect in investment and finance, and this may affect portfolio holders and managers who are the major decisionmakers in allocating their resources across different categories. This paper wishes to determine the availability of funds to be allocated to each component of the portfolio in order to maximize returns on the portfolio and to determine optimally the possible levels of investment in the selected portfolios of the firm under discussion. An emphasis on return maximization is considered and addresses the areas of investment, the investment constraints of the firm, and the levels of investments to maximize returns
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