Question

You are considering how to invest part of your retirement savings.You have decided to put $600,000 into three? stocks: 64% of the money in GoldFinger? (currently $22?/share), 22% of the money in Moosehead? (currently $93?/share), and the remainder in Venture Associates? (currently $2?/share). Suppose GoldFinger stock goes up to $36?/share, Moosehead stock drops to $68?/share, and Venture Associates stock rises to $3 per share.

a. What is the new value of the? portfolio?

b. What return did the portfolio? earn?

c. If you? don't buy or sell any shares after the price? change, what are your new portfolio? weights?

Answer 1

Now, the weight in 3 stocks G, M and V are 64%, 22% and 14%(=1-64%-22%) respectively.

This means, the initial value of the 3 stocks is as follows:

G: 64% * 600,000 = 384,000. At initial price of $22, this means 17,455 shares are purchased

M: 22% * 600,000 = 132,000. At initial price of $93, this means 1,419 shares are purchased

V: 14% * 600,000 = 84,000. At initial price of $2, this means 42,000 shares are purchased

Now, with change in prices

G: 17,455 shares @ $36 becomes investment value of $628,364

M: 1,419 shares @ $68 becomes investment value of $96,516

V: 42,000 shares @ $3 becomes investment value of $126,000

New Value of Portfolio is sum of all the new investment values = $850,880

Portfolio return = (850,880 - 600,000)/600,000 = 42%

New Portfolio weights:

G: 628,364/850,880 = 73.8%

M: 96,516/850,880 = 11.3%

V: 126,000/850,880 = 14.8%