Question

# 26 .S and T are two portfolios on the efficient frontier, the following table summarizes the...

26 .S and T are two portfolios on the efficient frontier, the following table summarizes the weights of five stock in each portfolio: Stock Stock Weights for Portfolio S Stock Weights for Portfolio T Expected Return INTC 20% 20% 15% MRK 20% 30% 25% MSFT 30% 20% 10% APPL 15% 0% 8% JPM 15% 30% 14% a) Find the expected return of each portfolio. b) Ouday invests \$500,000 in portfolio S and \$800,000 in portfolio T. 1) What amount of his portfolio will be invested in each stock? 2) Find the expected return of Ouday’s portfolio.

Expected Return on portfolio = Weights of stock in portfolio * expected return of the stocks

 Stocks Stock Weight for Portfolio S ( A) Stock Weight for Portfolio T ( B) Expected Return (C ) Expected Return on Portfolio S ( D = A*C) Expected Return on Portfolio T ( D = B*C) INTC 0.2 0.2 15 3.0 3.0 MRK 0.2 0.3 25 5.0 7.5 MSFT 0.3 0.2 10 3.0 2.0 APPL 0.15 0 8 1.2 0.0 JPM 0.15 0.3 14 2.1 4.2 Total - 14.3 16.7

Expected Return on Portfolio S = 14.3%

Expected Return on Portfolio T = 16.7%

 Stock Stock Weight for Portfolio S ( A) Amount Invested by Ouday in each stock ( A * 500000) INTC 0.2 \$100,000 MRK 0.2 \$100,000 MSFT 0.3 \$150,000 APPL 0.15 \$75,000 JPM 0.15 \$75,000 Total \$500,000
 Stock Stock Weight for Portfolio T ( B) Amount Invested by Ouday in each stock ( A * 500000) INTC 0.2 \$160,000 MRK 0.3 \$240,000 MSFT 0.2 \$160,000 APPL 0 \$0 JPM 0.3 \$240,000 Total \$800,000

Expected Return on Oudays Portfolio = (500000* 14.3 + 800000 *16.7 ) / ( 500000 +800000)

= ( 7150000 + 13360000) / 1300000

= 20510000 / 1300000

= 15.77%

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