Question

In order to fund her retirement, Michele requires a portfolio with an expected return of 0.11 per year over the next 30 years. She has decided to invest in Stocks 1, 2, and 3, with 25 percent in Stock 1, 50 percent in Stock 2, and 25 percent in Stock 3. If Stocks 1 and 2 have expected returns of 0.10 and 0.09 per year, respectively, then what is the minimum expected annual return for Stock 3 that will enable Michele to achieve her investment requirement? Round to two decimal places.

Answer 1

Expected return= W1*R1+W2*R2+W3*R3

Given,

W1 = 25%

W2 = 50%

W3 = 25%

R1 = 0.10

R2 = 0.09

Expected return = 0.11

0.11 = 0.25*0.1+0.50*0.09+0.25*R3

0.11 = 0.025+0.045+0.25*R3

0.11 = 0.07+0.25*R3

0.11-0.07= 0.25*R3

0.04 =0.25*R3

R3 = 0.04/0.25

R3 = 0.16

Expected return for stock 3 = 0.16