Question: Kathleen Allen, an individual investor, has $70,000 to divide among several investments. The alternative investments are municipal bonds with 8.5% annual return, certificates of deposit with a 50% return, treasury bills with a 6.5% return, and a growth stock fund with a 13% annual return. The investments are all evaluated after 1 year. However, each investment alternative has a different perceived risk to the investor; thus, it is advisable to diversify. Kathleen wants to know how much to invest in each alternative in order to maximize the return.

The following guidelines have been established for diversifying the investments and lessening the risk perceived by the investor:

1. No more than 20% of the total investment should be in municipal bonds

2. The amount invested in certificates of deposit should not exceed the amount invested in the other three alternatives.

3. At least 30% of the investment should be in treasury bills and certificates of deposit.

4. To be safe, more should be deposited in CDs and treasury bills than in municipal bonds and the growth stock fund, by a ratio of at least 1.2 to 1

How would the solution be affected if the if the requirement that the entire $70,000 be invested were relaxed such that it is the maximum amount available for investment.

If the entire amount available for investment does not have tom be invested and the amount available is increased by $10,000 (to $80,000), how much will the total optimal return increase ?. Will the entire $10,000 be invested in one alternative ?