Question

You have $19,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 15 percent and Stock Y with an expected return of 12 percent. Assume your goal is to create a portfolio with an expected return of 13.25 percent. How much money will you invest in Stock X and Stock Y?

Answer 1

Investment in Stock X will be $7917 and investment in Stock Y will be $11083.

Step-by-step explanation:

The portfolio return is the weighted average of the individual stock returns that form up the portfolio. The weightage is the investment in a stock as a proportion of the total investment in portfolio.

To calculate the weightage of investment in the stock, we will use the portfolio return formula for two stocks portfolio.

rP = wX * rX + wY * rY

Where,

• w represents the weightage

• r represents the rate of return

Let x be the weightage of investment in Stock X or wX.

Let (1-x) be the weightage of investment in Stock Y or wY.

0.1325 = x * 0.15 + (1-x) * 0.12

0.1325 = 0.15x + 0.12 - 0.12x

0.1325 - 0.12 = 0.03x

0.0125 / 0.03 = x

x = 0.4167 or 41.67%

and (1-x) = 1 - 0.4167 = 0.5833 or 58.33%

Thus, investment in Stock X is 19000 * 41.67% = $7917.3 rounded off to $7917

Investment in Stock Y = 19000 * 58.33% = $11082.7 rounded off to $11083