How to use system of linear equation in solving real-life scenario for investment portfolio planning?
Certainly! Here's another real-life scenario where solving a system of equations is crucial:
Scenario: Investment Portfolio Planning
Imagine you are a financial advisor helping a client plan their investment portfolio. The client has $50,000 to invest in two types of investment vehicles: stocks and bonds. The client wants to maximize the return on investment while ensuring that the portfolio is diversified. The expected annual return on stocks is 8%, and on bonds is 5%. Additionally, the client wants to invest at least $20,000 in stocks.
To solve this problem, we can set up a system of equations:
Let be the amount invested in stocks, and be the amount invested in bonds.
The constraints are:
- Total investment constraint:
- Minimum investment in stocks:
The objective is to maximize the total return on investment:
Now, we have the following system of equations:
We'll solve this system of equations to find the optimal allocation of funds between stocks and bonds that maximizes the return on investment while satisfying the constraints.
Let's proceed to find the solution:
From the constraint , we know that the investment in stocks must be at least $20,000.
Substituting into the total investment constraint , we get . Solving for , we find .
So, the optimal allocation is $20,000 in stocks and $30,000 in bonds.
Now, we'll calculate the total return on investment:
Therefore, the maximum expected return on investment is $3,100, achieved by investing $20,000 in stocks and $30,000 in bonds.