Question

You would like to invest $20,000 and have a portfolio expected return of 14 percent. You are considering two securities, M and N. M has an expected return of 20 percent and N has an expected return of 10 percent. How much should you invest in stock M if you invest the balance in stock N to achieve the 14 percent portfolio return?

Answer 1

Answer:

The amount invested in M = $8,000

The amount invested in N = $12,000

Explanation:

Data provided in the question:

Total amount invested = $20,000

Expected return on portfolio = 14%

Expected return on M = 20% = 0.20

Expected return on N = 10% = 0.10

Now,

Let the amount invested in M be 'x'

thus,

Amount invested in N will be = $20,000 - x

Thus,

According to the question

0.20(x) + 0.10($20,000 - x) = 0.14($20,000)

or

0.20x + $2,000 - 0.10x = $2,800

or

0.10x = $800

or

x = $8,000

Therefore,

Amount invested in N will be = $20,000 - $8,000

= $12,000

Hence,

The amount invested in M = $8,000

The amount invested in N = $12,000