Question

Returns and Actions Kunal Nayyar from London, had $60,000 in investments in the USA at the beginning of the year that consisted of a diversified portfolio of stocks (40 percent), bonds (40 percent), and cash equivalents (20 percent). His returns over the past 12 months were 14 percent on stocks, 5 percent on bonds, and 1 percent on cash equivalents. What is Kunal's average return for the year? Round your answer to one decimal place. % If Kunal wanted to rebalance his portfolio to its original position, what specific actions should he take?

Answer 1

Average rate of return is 7.8% , and total amount is $4,680

If Kunal wanted to rebalance his portfolio to its original position, he needs to transfer $672 (= $25,872 - $25,200) from stock account to bond account and $816 ( = $12,936 - $12,120) from stock account to cash.

Step-by-step explanation:

Total return for year = 14% * (40% of $60,000) + 5% * (40% of $60,000+ 1% *(20% of $60,000) = $4,680

Average rate of return = $4,680/ $60,000 = 7.8%

At beginning, the amount in per diversified portfolio is as below:

• Amount invested in stock = 40% * $60,000 = $24,000
• Amount invested in bond = 40% * $60,000 = $24,000
• Amount in cash = 20% *$60,000 = $12,000

After receiving return, the amount in per diversified portfolio is as below:

Amount invested in stock = $24,000 *(1+14%) = $27,360

• Amount invested in bond = $24,000 *(1+5%) = $25,200
• Amount in cash = $12,000 * (1 + 1%) = $12,120

And amount in Kunal’s investment fund = $27,360 + $25,200 + $12,120 = $64,680

If Kunal wanted to rebalance his portfolio to its original position, the amount in per diversified portfolio is as below:

Amount invested in stock = 40% * $64,680 = $25,872

• Amount invested in bond = 40% * $64,680 = $25,872
• Amount in cash = 20% * $64,680 = $12,936

⇒ Kunal needs to transfer $672 (= $25,872 - $25,200) from stock account to bond account and $816 ( = $12,936 - $12,120) from stock account to cash.