Question

You have $122,000 to invest in a portfolio containing stock X and stock Y. Your goal is to create a portfolio that has an expected return of 17.6 percent. Stock X has an expected return of 14 percent and a beta of 1.26, and stock Y has an expected return of 9.5 percent and a beta of 1.00. How much money will you invest in stock Y?

a) $56,000
b) $66,000
c) $76,000
d) $86,000

Answer 1

To determine how much money you will invest in stock Y, use the weight of an investment formula in a two-stock portfolio.

Step-by-step explanation:

To determine how much money you will invest in stock Y, you need to use the formula for finding the weight of an investment in a two-stock portfolio. The weight of an investment equals the amount invested divided by the total portfolio value. Let's assume the amount invested in stock Y is represented by 'Y'.

The expected return of the portfolio can be calculated by multiplying the weight of stock X by its expected return and adding it to the weight of stock Y multiplied by its expected return. The formula is: 0.176 = (0.14 * 0.0126) + (0.095 * 0.01).Solving this equation, we find that Y equals $76,000. Therefore, you should invest $76,000 in stock Y. So the correct option is c) $76,000.