Question

You have $20,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 14 percent and Stock Y with an expected return of 8 percent.

   

Required:

(a)	If your goal is to create a portfolio with an expected return of 10.1 percent, how much money will you invest in Stock X?
	A) $7,280 B) $7,350 C) $6,650 D) $7,000 E) $33,667

  

(b)	If your goal is to create a portfolio with an expected return of 10.1 percent, how much money will you invest in Stock Y?
	A) $13,520 B) $13,000 C) $12,480 D) $13,650 E) $12,350

Answer 1

(a) D) $7,000

(b) B) $13,000

Working:

Expected return of portfolio is the weighted average return of portfolio.

Suppose weight of Stock X is "w" and so weight of Stock Y will be "1-w"

Now as per the question,

0.101

=

(w*0.14)+((1-w)*0.08)

0.101

=

0.14w+(0.08-0.08w)

0.101

=

0.14w+0.08-0.08w

0.101

=

0.06w+0.08

0.021

=

0.06w

w

=

0.35

so, 1-w

=

1-0.35

=

0.65

Investment in:

Stock X

=

Total investment *Weight of Stock X

=

20000*0.35

=

$         7,000

Stock Y

=

Total investment *Weight of Stock Y

=

20000*0.65

=

$       13,000