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LPP Formulation

The client needs to invest Rs. 10,00,000 and expects a minimum 15% return. Five stocks are considered from the BSE Sensex that have a beta value below 1.2. An LP model is formulated to maximize return by determining the optimal amount to invest in each stock, subject to investing the total amount and achieving minimum expected return.

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aravindh kumaran
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35 views2 pages

LPP Formulation

The client needs to invest Rs. 10,00,000 and expects a minimum 15% return. Five stocks are considered from the BSE Sensex that have a beta value below 1.2. An LP model is formulated to maximize return by determining the optimal amount to invest in each stock, subject to investing the total amount and achieving minimum expected return.

Uploaded by

aravindh kumaran
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Assume you are investment advisor. You have a client who needs to invest Rs.

10,00,000 in Stock
Market. Client has a risk profile of ‘moderately aggressive’ meaning he doesn’t want to invest in stocks
that have a Beta value of more than 1.2. Choose few stocks from the BSE Sensex. Compute the average
annual return for each stock from the past one year historical data for the chosen stocks. Now formulate
an LP model to maximise your return and number of stocks to buy in your chosen list. Your client
expects a minimum return of 15% on the amount invested in one year.

Investment Average annual rate of return Beta value


Company 1 36.12% 0.467
Company2 7.22% 0.693
Company3 13.35% 0.409
Company4 26.97% 0.613
Company5 41.16% 0.581

*Beta Value collected from Topstockresearch.com

*Stock values collected from 1st Jan 2018 (opening)-31st Jan 2018 (closing) from the historical data
(IIFL.com)

1st Jan 31st Dec


Investment 2018(opening) 2018(Closing) No. of years A.A.R A.A.R as %
Company 1 1338.6 1822.05 1 0.3612 36.12
Company2 263 282 1 0.0722 7.22
Company3 936 1061 1 0.1335 13.35
Company4 519 659 1 0.2697 26.97
Company5 1341 1893 1 0.4116 41.16

*Annual rate of return ((Ending value/opening value)^1/n)-1


Decision Variables

X1  Amount to be invested in Company 1

X2-Amount to be invested in Company 2

X3 Amount to be invested in Company 3

X4 Amount to be invested in Company 4

X5 Amount to be invested in Company 5

Objective function:

Maximize Z = (36.12%) X1 + (7.22%) X2 + (13.35%) X3 + (26.97%) X4 + (41.16%)X5

Subject to:

1) X1+X2+X3+X4+X5=10,00,000 (Total investment)


2) Z>=1,50,000 (Minimum expected return)

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