Question

You have $250,000 to invest in a stock portfolio. Your choices are Stock H, with an expected return of 12.9 percent, and Stock L, with an expected return of 9.8 percent. If your goal is to create a portfolio with an expected return of 11.1 percent, how much money will you invest in Stock H? In Stock L?

Answer 1

Answer:

The investment in stock H will be $104837.5 while the investment in stock L will be $145162.5

Explanation:

The portfolio return is the weighted average return of the individual stocks that form up the portfolio. The weightage of each stock in the portfolio is the investment in a stock as a proportion of investment in the portfolio.

Let x be the weightage of Stock H.

Weightage of Stock L will be (1-x).

Portfolio return = wH * rH  +  wL * rL

Plugging in the values,

0.111 = x  * 0.129   +   (1-x) * 0.098

0.111 = 0.129x  +  0.098  -  0.098x

0.111- 0.098  =  0.031x

0.013 / 0.031  = x

x = 0.41935 or 41.935% rounded off to 3 decimal places

(1-x) = 1 - 0.41935  =  0.58065 or 58.065%

Investment in Stock H = 250000 * 41.935%  =  $104837.5

Investment in Stock L = 250000 * 58.065%  =   $145162.5