Question

You have $13,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 13 percent and Stock Y with an expected return of 8 percent. Assume your goal is to create a portfolio with an expected return of 11.45 percent. How much money will you invest in Stock X and Stock Y

Answer 1

You should invest $8,970 in stock X and $4,030 in stock Y.

Step-by-step explanation:

These can be estimated as follows:

PER = (ERX * wX) + (ERY * wY) ....................... (1)

Where,

PER = Portfolio expected return = 11.45%, or 0.1145

ERX = Expected return of X = 13%, or 0.13

ERY = Expected retun of Y = 8%, or 0.08

wX = Weight of X = ?

wY = Weight of Y = 1 - wX = ?

Substituting the values into equation (1), we have:

0.1145 = [0.13 * wX] + [0.08 * (1 - wX)]

0.1145 = 0.13wX + [0.08 - 0.08wX]

0.1145 = 0.13wX + 0.08 - 0.08wX

0.1145 - 0.08 = 0.13wX - 0.08wX

0.0345 = 0.05wX

wX = 0.0345 / 0.05

wX = 0.69

Since wY = 1 - wX

Therefore,

wY = 1 - 0.69

wY = 0.31

Total amount to invest = $13,000

Investment in stock X = Amount to invest * 0.69 = $13,000 * 0.69 = $8,970

Investment in stock Y = Amount to invest * 0.31 = $13,000 * 0.31 = $4.030

Therefore, you should invest $8,970 in stock X and $4,030 in stock Y.