Question

You are constructing a two stock portfolio based on the information provided below. What dollar amount will you invest in each stock to achieve the desired return goal? Stock X Stock Y Expected Return 14.0% 9.0% Goal Return of Portfolio: 12.90% Dollar Amount to Invest: $20,000

Answer 1

Expected Return of stock X =14%

Expected Return of stock Y = 9%

Target return of Portfolio =12.90%

Assume weight of X = X

And Y weight will be = 1-X

Expected return of Portfolio = (weight of X * return of X)+(weight of Y* return of Y)

12.90% = (14%*X)+(9%*(1-X))

0.129= 0.14X +0.09-0.09X

0.129-0.09= 0.05X

X = 0.039/0.05

x = 0.78

Weight of Y= 1-0.78= 0.22

Dollar amount invested in Stock X = Total investment * weight of X

=20000*0.78

=15600

Investment in Y = 20000*0.22

=$4400

So dollar amount in stock X would be $15600 and $4400 for Y to achieve 12.90% target return