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# Optimization Problem

Discussion in 'Automated Trading' started by baller1069, Jan 24, 2008.

1. ### baller1069

I am trying to learn some optimization and am going through some questions and can't figure this one out at all.

Here it is:

Your fraternity, has decided to set up a legacy scholarship fund for future members using money left over from the frat house beer fridge receipts. Since the scholarship is for future frat members, no one at the frat today can be eligible so you have to wait 5 years for everyone to graduate from their co-op degree programs before the monies can be awarded. The award will be valued at \$12,000 for the first year and increase \$2,000 per year for three more years after which the fund will be exhausted (youâre leaving only a temporary legacy). You have the following investment options:

There are 4 investment vehicles:

1) G.I.C which is available for purchase every year and matures at the end of each year. Its return at Maturity is 6%.

2) Energy Trust which is available for purchase in year 1, 2, 5, and 7 and matures at the end of 2 years. Its return at maturity is 14%.

3) Long term G.I.C. which is available for purchase in year 1 & 4 and matures at the end of 3 years. Its return at maturity is 18%.

4) Growth Fund which is available in year one and matures at the end of 7 years. Return at maturity is 65%.

You want to come up with an investment plan to meet the funding objective while minimizing the initial investment outlay of cash (i.e. everything left over from the beer fridge receipts after making these investments will be used for a party to celebrate your fraternityâs philanthropy!)
1) Determine the algebraic formulation of this problem. What type of problem is it? Why?
2) Solve the problem using Excel, that is, determine the investment plan.