A portfolio manager is trying to balance investments between bonds, stocks and cash. The return on stocks is 12 percent, 9 percent on bonds, and 3 percent on cash. The total portfolio is $1 billion, and he or she must keep 10 percent in cash in accordance with company policy. The fund’s prospectus promises that stocks cannot exceed 75 percent of the portfolio, and the ratio of stocks to bonds must equal two. Formulate this investment decision as a linear programming problem, defining fully your decision variables and then giving the objective function and constraints. Solve the problem and show the optimal solution.
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