Question

You have $261,000 to invest in a stock portfolio. your choices are stock h, with an expected return of 14.1 percent, and stock l, with an expected return of 11.2 percent. if your goal is to create a portfolio with an expected return of 12.55 percent, how much money will you invest in stock h and in stock l?

Answer 1

To achieve an expected return of 12.55% on a $261,000 investment, you would invest approximately $120,293.10 in Stock H and $140,706.90 in Stock L.

Step-by-step explanation:

To determine how much money you will invest in Stock H and Stock L to achieve a portfolio with an expected return of 12.55 percent, you can set up a system of equations based on the weighted average of the expected returns from both stocks. Let's denote the amount to invest in Stock H as x and in Stock L as y. Then, the equations reflecting your investment total and the desired expected return would be:

• x + y = $261,000 (total investment)
• 0.141x + 0.112y = $261,000 * 0.1255 (desired expected return)

Solving these equations simultaneously gives you the values for x and y. For the first equation, you can express y in terms of x:

y = $261,000 - x

For the second equation, substitute y:

0.141x + 0.112($261,000 - x) = $32,720.55

Simplifying and solving for x gives you the amount to invest in Stock H:

0.141x + $29,232 - 0.112x = $32,720.55

0.029x = $3,488.55

x ≈ $120,293.10

Substitute x back into the first equation to find y:

y = $261,000 - $120,293.10 ≈ $140,706.90

You would invest approximately $120,293.10 in Stock H and $140,706.90 in Stock L to achieve a portfolio with an expected return of 12.55 percent.