# Provide the investment strategy that maximizes projected profit and meets the above constraints....

## Question:

Cardinal Capital is a company that makes relatively high risk/high return investment in promising small businesses across multiple markets. The company is in the process of developing a strategy/policy for its 2017 investment portfolio, which will have a maximum of \$15 Million with which to work. The table below provides data gathered from the analysis of historical Investments and future projections. The median rate of return is what the company has decided to use as a tool to inform decisions about the type of business in which to invest. The loss rate represents the historical likelihood that the company will lose all or part of its investment. For calculation purposes, it is assumed that the entire investment is lost. | Type of Business | Median Rate of Return | Loss Rate | Soft ware | 20% | 14% | Retaurant/ Food Production | 7% | 5% | Retail | 5% | 4% | Manufacturing | 10% | 6 % | Tourism| 15% | 9% To meet is competition, business, and community goals, Cardinal has several entering goals: - Retail and Restaurant/Food Production must be at least 40% of the dollar value of all investments - Software must be more than 30% of the dollar value of all investments - Manufacturing must be at least 10% of the dollar value of all investments. Provide the investment strategy that maximizes projected profit and meets the above constraints. What other questions may be asked by Cardinal to further refine its strategy?

## Investment and Expected Value:

In investing the two main things you judge an investment by are its expected return and risk. Usually higher risk means higher expected returns in the long-run. This is why stocks often outperform "safe" bonds.

## Answer and Explanation: 1

Type of Business Median Rate of Return Loss Rate Expected Return
Soft ware 20% 14% 7%
Retaurant/ Food Production 7% 5%2%
Retail 5% 4%1%
Manufacturing 10% 6 %4%
Tourism 15% 9%6%

To solve this problem we first need to get the expected return for each investment which is in the above table as the median rate of return minus the loss rate. Ideally, we would want all our money to go to the investment with the highest expected return which is software, but we have constraints. Therefore, we will satisfy our constants and then allocate all remaining funds to software.

If 40% must go to Retail and Restaurant/Food Production, we will put all 40% in Restaurant/Food Production since it has the higher expected return of 2% instead of 1% for Retail. If 10% must go to Manufacturing then 10% will go to Manufacturing. The remaining 50% will all go to Software and we have our investment strategy.

Further questions should be about what risks the investors all willing to take. If they are risk averse, then possibly Software shouldn't be 50% of the portfolio since it has a high loss rate.

#### Learn more about this topic:

Risk Management for Information Technology

from

Chapter 2 / Lesson 3

Risk management is the addressing of unexpected or complex situations in the workplace, which includes navigating information technology issues. Learn how to identify different types of risk, and how to analyze and respond to information technology risks.