Question

You have $18,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 14 percent and Stock Y with an expected return of 11 percent. Assume your goal is to create a portfolio with an expected return of 12.45 percent. How much money will you invest in Stock X and Stock Y

Answer 1

Answer:

Investment in stock X = 18000 * 29/60  = $8700

Investment in stock Y = 18000 * 31/60  = $9300

Explanation:

The expected return of portfolio is the function of the weighted average of the individual stock returns that form up the portfolio. The formula for the expected return of portfolio is,

Portfolio return = wA  * rA  +  wB  *  rB  +  ...  +  wN * rN

Where,

• w is the weight of each stock in the portfolio
• r is the return of each stock

Let x be the investment in stock X.

Let (1-x) be the investment in stock Y

0.1245 = x * 0.14  +  (1 - x) * 0.11

0.1245 = 0.14x  +  0.11 - 0.11x

0.1245 - 0.11 = 0.14x - 0.11x

0.0145 = 0.03x

0.0145 / 0.03  =  x

x = 29/60 or 0.483333 or 48.3333%

If x is 29/60, then (1-x) will be,

1 - 29/60  =>  31/60 or 0.516667 or 51.6667%

The total investment if of $18000

Investment in stock X = 18000 * 29/60  = $8700

Investment in stock Y = 18000 * 31/60  = $9300