Question

8. you are contemplating investing in two stocks a and b that have an expected return of 15% and 10% respectively. if your target expected return from your portfolio is 13%, what should be the weight of your investment in a? a. 0.33 b. 0.50 c. 0.60 d. it cannot be determined from the information above

Answer 1

To reach a target expected return of 13% based on the given expected returns of stocks A and B, you should allocate 60% of your investment to stock A.

Step-by-step explanation:

To determine the weight of investment in stock A to achieve a target expected return of 13%, we can use the formula:

Weight of A x Expected return of A + (1 - Weight of A) x Expected return of B = Target expected return

Let's call the weight of investment in stock A as 'w'. Then: w x 15% + (1 - w) x 10% = 13% 0.15w + 0.10 - 0.10w = 0.13 0.05w = 0.03

w = 0.03 / 0.05 = 0.60

The weight of your investment in stock A should be 0.60 or 60%, making the answer (c) 0.60.