Question

In: Finance

You are considering how to invest part of your retirement savings.You have decided to put $600,000...

You are considering how to invest part of your retirement savings.You have decided to put $600,000 into three​ stocks: 54% of the money in GoldFinger​ (currently $25​/share), 8% of the money in Moosehead​ (currently $85​/share), and the remainder in Venture Associates​ (currently $3​/share). Suppose GoldFinger stock goes up to $31​/share, Moosehead stock drops to $57​/share, and Venture Associates stock dropsdrops to $2 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? please help, Thank You

Solutions

Expert Solution

Total capital to invest = $600,000 (given)

Stock 1 --> Goldfinger
Portion of capital = 54% (given)
Capital in amount = $600,000 * 54% = $324,000
Share price = $25 (given)
Number of shares bought = 324,000 / 25 = 12960 shares

Stock 2 --> Moosehead
Portion of capital = 8% (given)
Capital in amount = $600,000 * 8% = $48,000
Share price = $85 (given)
Number of shares bought = 48,000 / 85 = 565 shares (rounded off)

Stock 3 --> Venture Associates
Portion of capital = 38% (given)
Capital in amount = $600,000 * 38% = $228,000
Share price = $3 (given)
Number of shares bought = 228,000 / 3 = 76000 shares

AFTER PRICE CHANGE

Stock 1 --> Goldfinger
New Share price = $31 (given)
Number of shares bought = 324,000 / 25 = 12960 shares
Total new value = 12960 * 31 = $401,760

Stock 2 --> Moosehead
New Share price = $57 (given)
Number of shares bought = 48,000 / 85 = 565 shares (rounded off)
Total new value = 565 * 57 = $32,205

Stock 3 --> Venture Associates
Share price = $2 (given)
Number of shares bought = 228,000 / 3 = 76000 shares
Total new value = 76000 * 2 = $152,000


Part a

Therefore, the new value of the portfolio is the new value of stock 1 + new value of stock 2 + new value of stock 3
the new value of the portfolio = $401,760 + $32,205 + $152,000 = $585,965

Part b

The portfolio earned a negative return as the value of the portfolio reduced.
The return that the portfolio earned is calculated by --> [(old value - new value) / old value] * 100
The return that the portfolio earned is --> [(600000 - 585965) / 600000 * 100] = -2.34%

Part c

New portfolio weights of each stock are --> [(stock value / total portfolio value) * 100]

Total portfolio value (new) = $585,965 (calculated above)

For Stock 1 --> Goldfinger
Total new value = $401,760 (calculated above)
Weight in portfolio = [(401760/585965) * 100] = 68.56%

Stock 2 --> Moosehead
Total new value = 565 * 57 = $32,205 (calculated above)
Weight in portfolio = [(32205/585965) * 100] = 5.50%

Stock 3 --> Venture Associates
Total new value = 76000 * 2 = $152,000 (calculated above)
Weight in portfolio = [(152000/585965) * 100] = 25.94%


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