People's Investment
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Colorado State University, Global Campus *
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May 2, 2024
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Case Study: People’s Investment Company As an investment advisor for Fred Wheeler of Wheeler’s Wheels, Inc., you have provided him with a list of ten “hot” investments falling into four broad categories for immediate investment opportunities. The table below summarizes these investments together with their important investment characteristics. Note that First General Real Estate Investment Trust is listed under both Equities and Real Estate, but it is one investment
. Category Investment Expected Annual After-
Tax Return Liquidity Factor Risk Factor Equities Z Corporation General Lee’s Barbecue Huts First General REIT 15.0% 17.0% 17.5% 100 100 100 60 70 75 Debt Western California Electric Z Corporation San Marcos Rapid Transit 11.8% 12.2% 12.0% 95 92 79 20 30 22 Real Estate Gala Apartment Partnership First General REIT 22.0% 17.5% 0 100 50 75 Money T-Bill Account Money Market Fund All Saver’s Certificate 9.6% 10.5% 12.6% 80 100 0 0 10 0 Fred Wheeler has come to you with a possible investment of $400,000 cash. Because you are a successful investment counselor, you have solicited the following information from Fred to guide you in recommending your investment strategy. Fred is relatively cautious and desires an average liquidity factor of at least 65 and an average risk of no more than 40. At most, $60,000 is to be invested in Z Corporation stocks or bonds. No more than 40% of the portfolio is to be invested in any one category. With the exception of the Money Market Fund, no more than 20% of the portfolio can be in any one investment. At least $1,000 must be put in the Money Market Fund; at most $15,000 is to be placed in the All Saver’s Certificates. The total investment in debt is to be no more than $90,000, and at least $10,000 must be invested in a T-Bill Account. Recommend an investment portfolio for Fred Wheeler. Analyze the limitations of the constraints. Among other analyses, determine the expected return of additional dollar investments. Which of his constraints are limiting, which are the most limiting, and what, if any, recommendations would you make to Fred concerning his constraints? Note: Here is an example of calculating the average liquidity factor for a portfolio of two investments. Investment Liquidity Factor
1 100 2 50 If you invest $
x
1
in Investment 1 and invest $
x
2
in Investment 2, then the average liquidity factor for your portfolio is Same idea applies to the calculation of the average risk factor. Preparation Questions (turn in before class starts
): 1)
Write down the objective function for Fred’s investment portfolio. 2)
Write down the constraints for Fred’s investment portfolio. Hint: budget constraints, liquidity factor constraints, investment in one category constraints, Money Market Fund constraint, All Saver’s constraint, debt constraint, T-bill constraint 3)
Build the spreadsheet model and solve it. Case Questions (I will go over in class): 1.
What is the recommended portfolio mix for Fred given his constraints? 2.
What would happen to Fred’s return if: a.
He can invest up to $65,000 in Z Corporation? b.
He must invest at least $2,000 in the Money market Fund? c.
He can invest no more than $75,000 in debt? 3.
What happens to the overall return if the Expected Annual After-Tax Return (EAATR) changes to 17.5% for General Lee’s Barbecue? 4.
What happens to the overall return if the EAATR changes to 10% for the Money Market Fund? 5.
What happens to the overall return if the EAATR changes to 13% for the Z Corporation Debt? 1
2
1
2
1
2
1
2
1
2
Average liquidity factor
=100
50
100
50
x
x
x
x
x
x
x
x
x
x
´
+
´
+
+
´
+
´
=
+
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States
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