UNIVERSITY OF GHANA BUSINESS SCHOOL

UGBS 301 – QUANTITATIVE METHODS FOR BUSINESS

TUTORIAL SET CISE ONE – LINEAR PROGRAMMING
(FEBRUARY 2023)
Not to be submitted

1. An investor has identified two companies to invest in. company 1 is an extractive

company; company 2 is a tech company. Company 1 is currently trading for Ghc40 per
share and company 2 is currently trading for Ghc25 per share. If the investment is
undertaken, the investor estimates that the price of Company 1 will go to Ghc55 per share
and Company 2 will go to Ghc43 per share. The investor has identified Company 2 as the
higher risk alternative. The investor is willing to invest a maximum of Ghc 50,000 in the
two companies from which it would want to invest at least Ghc15000 in Company 1 and
at least Ghc10,000 in Company 2. Because of the higher risk associated with Company 2,
the investor has recommended that at most Ghc25000 should be invested in Company 2
a. Formulate a linear programming model that can be used to determine the optimal number
of shares of each company the investor should buy in order to maximize the total returns
for the investment
b. Graph the LP model to obtain the feasible region
c. Find the optimal solution for the LP problem
d. Determine the slacks/ surplus for each of the constraints and determine which ones are
binding or not binding
 2. Ecobank EDC Ghana is a mutual fund, that pool monies from various investors which are
invested in securities selected by professional managers. EDC just obtained $100,000 and
wants to invest this amount into some financial instruments thereby diversifying its
portfolio and maximize its returns. Their chief financial officer recommended that all
investments be made in Goil (oil firm), Total Energy (oil firm), Devtraco Ltd (real
estate), Trasacco (real estate) and Treasury Bills (TBs). The respective rates of return are
7.3%, 10.3%, 6.4%, 7.5% and 4.5%. Management of Ecobank EDC imposed the
following investment guidelines:
 Neither industry (oil or real estate) should receive more than $50,000.
 TBs should be at least 25% of the real estate industry investments.
 The investment in Total Energy, the high-return but high-risk investment cannot
be more than 60% of the total oil industry investment.

a) Define the decision variables for Ecobank’s EDC portfolio selection problem.

b) Formulate the LP model for solving the EDC’s investment opportunities problem.

c) Convert the model to the standard form.

Your model was solved using Excel Solver and the sensitivity report is given below. Use it to
answer the questions that follow:

Variable Cells
Final Reduced Objective Allowable Allowable
Name Value Cost Coefficient Increase Decrease
Goil 20000 0 0.073 0.03 0.055
Total Energy 30000 0 0.103 1E+30 0.03
Devtraco 0 -0.011 0.064 0.011 1E+30
Trasacco 40000 0 0.075 0.0275 0.011
TBs 10000 0 0.045 0.03 1E+30
Constraints
Final Shadow Constraint Allowable Allowable
Name Value Price R.H. Side Increase Decrease
10000
Available fund 0.069 100000 12500 50000
0
Oil industry Max. 50000 0.022 50000 50000 12500
Real Estate Max. 40000 0 50000 1E+30 10000
 T-Bills 0 -0.024 0 50000 12500
Oil Industry
restriction 0 0.03 0 20000 30000

d) What is the optimal solution for this portfolio optimization problem for EDC and the
corresponding projected annual return for this portfolio?

e) Which constraints are binding, and which are not? Justify with 2 reasons

f) Suppose the projected rate of return on Trasacco was augmented by 2.4%. Is that
feasible? What impact will this have on the optimal solution? What would be the exact
effect on the total portfolio return?

g) If management of Ecobank EDC had the choice of increasing government bonds (beyond
the minimum requirement) (constraint 4) by $1000 or total available funds by $500,
which one would be more profitable and why?

h) What does the reduced cost value of Devtraco mean?

 3. The government of Ghana has available GHC 1 billion earmarked for financing the Free SHS
program next year. Instead of letting this money sit in the bank account for a paltry 6% risk free
interest rate, it has decided to invest half of the money in four stocks on the Ghana Stock
Exchange (GSE). The four stock options the government is considering and the relevant financial
data are as follows:

Stocks

A B C D

Price per share (in GHC) 100 50 80 40

Annual Return (in GHC) 18 6 8 8

Possible Loss Per Share ( in GHC) 10 6 6 5

However, the annual return is only a forecast (provided by experts at the ministry of finance),
and could be worse or better- a risk that the government has been advised to be wary of in order
not to jeopardize the finances of the Free SHS program. For example, though a share of stock A
could yield a return amount of GH₵ 18, it is also likely it could lead to a loss of GH₵ 10.

In order to minimize the risk (i.e. losses) associated with investing on the GSE, the Finance
Ministry has advised the government to adhere to the following guidelines:

(1) The total forecasted annual return for the four stocks must be at least 9% of the total
amount invested to justify the investment. Also, total possible losses must not exceed 8%
of the total amount invested.
(2) The amount invested in stock A and stock C must not exceed GHC200 million since
when one performs better (worse) the other also performs better (worse). Likewise, the
amount invested in Stock B and D must not exceed GHC350 million for the same reason
as that of Stock A and C.
(3) Although Stock A carries a risk of a loss of GHC 10, the government is willing to buy at
least 500,000 shares given the high return of Ghc18 per share.
 a. Formulate a linear programming model to determine the number of shares of each
stock the government should buy in order to minimize the risk involved. Note that
the government is not obliged to spend all the money intended for investment.

Final Reduced Objective Allowable Allowable

Name Value Cost Coefficient Increase Decrease
Shares in Stock A 2000000 0 10 1.25 1E+30
Shares in Stock B 0 2.25 6 1E+30 2.25
Shares in Stock C 0 2 6 1E+30 2
Shares in Stock D 1125000 0 5 3 0.56
Final Shadow Constraint Allowable Allowable
Name Value Price R.H. Side Increase Decrease
Possible losses 25625000 0 40000000 1E+30 14375000
Annual return 45000000 0.625 45000000 23000000 9000000
Amount in stock A and C 200000000 -0.0125 200000000 50000000 150000000
Amount in stock B and D 45000000 0 350000000 1E+30 305000000
Amount to invest 245000000 0 500000000 1E+30 255000000
Shares of stock A 2000000 0 500000 1500000 1E+30
b. How many shares of each stock should be bought given the objective and the constraints,
and what is the total possible loss that could occur?
c. Will the allocation change if the objective coefficient value for Stock B is decreased by
GH₵ 3? Explain
d. What will happen to the possible total loss if the total annual return requirement were to
be raised by GH₵ 10,000,000?
e. Interpret the reduced cost of GH₵ 2 for Stock C.