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The investment example adopts this multi-objective approach

The investment example adopts this multi-objective approach to Bank Three. Bank Three has a modest $… Show more The investment example adopts this multi-objective approach to Bank Three. Bank Three has a modest $20 million capital, with $150 million in demand deposits (checking accounts) and $80 million in time deposits (savings accounts and certificates of deposit). Table A displays the categories among which the bank must divide its capital and deposited funds. Rates of return are also provided for each category together with other information related to risk. Table A: Bank Three Investment Opportunities Return Rate Liquid Part Required Capital Risk Asset? # Investment Category % % % % 1 Cash 0.0 100.0 0.0 No 2 Short Term 4.0 99.5 0.5 No 3 Government: 1-5 years 4.5 96.0 4.0 No 4 Government: 6-10 years 5.5 90.0 5.0 No 5 Government: Over 10 years 7.0 85.0 7.5 No 6 Investment Loans 10.5 0.0 10.0 Yes 7 Mortgage Loans 8.5 0.0 10.0 Yes 8 Commercial loans 9.2 0.0 10.0 Yes To complete the model of bank Three’s investment plans, five types of constraints are described as follows. 1. Investments must sum to the available capital and deposit funds 2. Cash reserves must be at least 14% of demand deposits plus 4% of time deposits. 3. The portion of investments considered liquid, from Table A, should be at least 47% of demand deposits plus 36% of time deposits. 4. At least 5% of funds should be invested in each of the eight categories, for diversity. 5. At least 30% of funds should be invested in commercial loans to maintain the bank’s community status. Objective Function Scenario 1 Scenario 2 Scenario 3 Objective Function Risk Rate Adjustment % Rate of Return Adjustsment % Liquidity Adjustment % Minimize capital adequacy +0.95 0.75 1.10 • Show less

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