Blair & Rosen, Inc. is a brokerage firm that specializes in investment
portfolios designed to meet the specific risk tolerances of its clients.
A client who contracted B&R this past week has a maximum of $50,000 to
invest. B&R's investment advisor has decided to recommend a portfolio
consisting of two investment funds: an Internet fund and a Blue Chip
fund. The Internet fund has a projected annual return of 12%, while the
Blue Chip fund has a projected annual return of 9%. The investment
advisor requires that at most $35,000 of the client's funds should be
invested in the Internet fund. B&R services include a risk rating for
each investment alternative. The Internet fund, which is the more risky
of the two investment alternatives, has a risk rating of 6 per thousand
dollars invested. The Blue Chip fund has a risk rating of 4 per thousand
dollars invested. For example, if $10,000 is invested in each of the two
investment funds, B&R's risk rating for the portfolio would be 6(10) +
4(10) = 100. Finally, B&R has developed a questionnaire to measure each
client's risk tolerance. Based on the responses, each client is
classified as a conservative, moderate, or aggressive investor. Suppose
that the questionnaire results have classified the current client as a
moderate investor. B&R recommends that a client who is a moderate
investor limit his or her portfolio to a maximum risk rating of 240.
Source: An Introduction to Management Science, pg. 72