Question

ou have $35,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 16 percent and Stock Y with an expected return of 8 percent.

  

If your goal is to create a portfolio with an expected return of 10.8 percent, how much money will you invest in Stock X?

  

If your goal is to create a portfolio with an expected return of 10.8 percent, how much money will you invest in Stock Y?

Answer 1

In total, we have $35,000 to invest in a stock portfolio.

Now the expected rate of return on portfolio = 10.8%

Therefore, required return in $ terms from portfolio = Total Investment * Required rate in %age  

= $35,000*10.8% = $3,780

Now suppose that we have invested $ A in Stock X, which will leave $(35,000-A) to be invested in Stock Y.

We know that:

Return from the portfolio in $ terms = (Investment in stock X* Expected return from X) + (Investment in stock Y* Expected return from Y)

Putting the figures in the above equation, we get:

$3,780 = (A*16%) + ((35,000-A)*8%)

$3,780 = 0.16A + $2,800 - .08A

$980 = 0.08A

Therefore, A = $12,250

That means amount to be invested in Stock X = $12,250

And amount to be invested in Stock Y = $(35,000-12,250) = $22,750