Question

You have $12,000 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 10 percent. Assume your goal is to create a portfolio with an expected return of 12.30 percent. How much money will you invest in Stock X and Stock Y? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)You have $12,000 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 10 percent. Assume your goal is to create a portfolio with an expected return of 12.30 percent. How much money will you invest in Stock X and Stock Y? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Answer 1

Investment in Stock X will be = $6900

Investment in Stock Y will be = $5100

Step-by-step explanation:

The expected return of a portfolio is the function of the weighted average of the individual stocks' returns that form up the portfolio. The expected return of portfolio can be calculated as follows,

Portfolio Expected Return = wA * rA + wB * rB + ... + wN * rN

Where,

• w represents the weight of each stock in the portfolio
• r represents the return of each stock in the portfolio

We know the target return for our portfolio and the individual stock's returns. To calculate the investment in each stock, we need to calculate the weightage.

Let x be the weightage of investment in Stock X and (1 - x) be the weightage of investment in Stock Y.

0.1230 = x * 0.14 + (1 - x) * 0.1

0.1230 = 0.14x + 0.1 - 0.1x

0.1230 - 0.1 = 0.04x

0.023 / 0.04 = x

x = 0.575 or 57.5%

So, investment in Stock X will be = 0.575 * 12000 = $6900

Investment in Stock Y will be = 12000 - 6900 = $5100