Question

Do not do any interim rounding, calculate values to 6 decimal places before converting to percentages, state the answer as a percentage to two places, do not use labels (%, $). For example, if the value is 0.06458, the answer is 6.46.

Riley Stein estimates the expected returns for Cromarty LTD and Tindall Cos to be 13.6% and 9.4% respectively. She wants to build a portfolio with an expected return of 10.75%. The weight of Cromarty in the portfolio should be:

Answer 1

Expected return of Cromarty, Rc = 13.6%

Expected return of Tindall Cos, Rt = 9.4%

Expected return on Portfolio, Rp = 10.75%

Let W be the weight of Cromarty, then Weight of Tindall is (1-W)

W * 13.6% + (1-W)* 9.4% = 10.75%

13.6* W +9.4 - 9.4 W = 10.75

4.2*W = 10.75 - 9.4 = 1.35

W = 1.35/4.2 = 32.14%= Weight of Cromarty in Portfolio

= 32.14