Question

South Park Company's stock has an expected Return of 10.07% while Quahog Company's stock has an expected return of 10.31%. What % of my wealth should I invest in Quahog Company's stock to have an expected return of 10.77%? Report you answer as a % with 2 decimals. If your answer is 3.56%, just enter/type "3.56"

Answer #1

Expected Return of South Park Company = 10.07%

Expected Return of Quahog Company = 10.31%

Let weight of Quahog Company be x and weight of South Park Company be (1 - x)

Expected Return of Portfolio = Weight of South Park Company *
Expected Return of South Park Company + Weight of Quahog Company *
Expected Return of Quahog Company

0.1077 = (1 - x) * 0.1007 + x * 0.1031

0.1077 = 0.1007 - x * 0.1007 + x * 0.1031

0.007 = x * 0.0024

x = 2.9167 or 291.67%

Weight of Quahog Company = 291.67%

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