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

a) Kunal's average return = 14% x 0.40 + 5% x 0.40 + 1% x 0.20 = 7.8%

b)

Security	Investment at beginning	Investments at end (a)	Desired investment (b)	Rebalancing (b - a)
Stock	$60,000 x 0.40 = $24,000	$24000 x 1.14 = $27360	$64680 x 0.40 = $25872	(-)$1488
Bonds	$60,000 x 0.40 = $24,000	$24000 x 1.05 = $25200	$64680 x 0.40 = $25872	$672
Cash equivalents	$60,000 x 0.20 = $12,000	$12000 x 1.01 = $12120	$64680 x 0.20 = $12936	$816
Total	$60,000	$64680	$64680	Net effect = 0

So, to rebalance the portfolio, Kunal would want to move $1488 from the stocks and invest $672 in bonds and $816 in cash equivalents.