Question

You are considering how to invest part of your retirement savings. You have decided to put 500,000 into three stocks:

51% of the money in GoldFinger(Currently $27/share), 17% of the money in Moosehead(currently $98/share), and the remainder in Venture Associates(currently $5/share). Suppose GoldFinger stock goes up to $39/share, Moosehead stock drops to $64/share, and Venture Associates stock rises to $19 per share.

a. What is the new value of the portfolio?

b.What return did the portfolio earn?

c.If you don't buy or sell any shares after the price change, what are your new portfolio weights?

Answer 1

a. What is the new value of the portfolio?

No. of shares of GoldFinger = 51%*500000/27 = 9,444.44 shares

No. of shares of Moosehead= 17%*500000/98 = 867.34 shares

No. of shares of Venture Associates = 32%*500000/5 = 32000 shares

The new value of portfolio = 9,444.44 * 39 + 867.34 * 64 + 32000 * 19 = 368,333.16 + 55,509.76 + 608,000

The new value of portfolio = $1,031,842.92

b.What return did the portfolio earn?

Initial investment = $500,000

Current value of investment = $1,031,842.92

Return = (1,031,842.92/500,000) -1 = 106.36%

Hence portfolio earned a 106.36% return.

c.If you don't buy or sell any shares after the price change, what are your new portfolio weights?

The portfolio weights are the fraction of value invested in each stock.

New portfolio weights are,

GoldFinger =  9,444.44 * 39 / 1,031,842.92 = 35.69%

Moosehed =  867.34 * 64 / 1,031,842.92 = 5.37%

Venture Associates = 32000 * 19 / 1,031,842.92 = 58.92%

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