Question

At the beginning of the year I have $125,000 to invest. I build my optimal portfolio by doing careful capital allocation. 65% goes into an Index ETF, while 35% goes into Secure (risk-free) assets.

Over the year, the index ETF earns 9.4%, while the risk-free asset earns 1.4%.

Calculate the new total value of my portfolio, and calculate the new weight of the Index ETF in my portfolio?

{Give your answer as a percentage with 2 decimals, e.g., if the result of your calculations is 0.345224 (or 34.5224%) , enter 34.52 as your answer.}

Answer 1

Solution:

Total Investment = $125000

Index ETF = 125000*65% = 81250

Risk free Assets = 125000*35% = 43750

Expected Return

= Weight of Index ETF * Return of Index ETF + Weight of risk free assets * Return of risk free assets

= 0.65 * 9.4 + .35 * 1.4

= 6.6 %

Total Return on Investment = 125000 * 6.6%

= 8250

New Portfolio Value = Investment + Return = 125000+8250 = $133250

New weight of Index ETF

= (Investment in Index ETF + return on Index ETF) / New Portfolio Value

= (81250 + (81250 * 9.4%)) / 133250

= (81250 + 7637.5) / 133250

=88887.5/133250

= 67%