Question

**Assume you are investing $100,000. You are going to
allocate your $100,000 between four securities. Historical average
annual rates of return for each security are as follows: Security
A: 2%; Security B; 5%; Security C: 9%; Security D:15%.**

**Round percentage answers to** one decimal place.
Round dollar answers to the **nearest whole
dollar**.

**If you allocate your funds equally between the four
securities, what is the average rate of return you will earn %?
What will your investment be worth in 15 years, assuming you earn
that rate every year? $.**

**If instead you allocate your funds between the four
securities unevenly, using this structure: 10% to Security A, 20%
to Securities B and D, and 50% to Security C, what is the average
rate of return you will earn? % What will your investment be worth
in 15 years, assuming you earn that rate every year?
$.**

Answer #1

1. If $100,000 has equal weights then Stock A, Stock B, Stock C and Stock D has weights of 25%

The annual expected average return=(25%*2%)+(25%*5%)+(25%*9%)+(25%*15%)=7.8%

The investment becomes after 15 years=$100,000*(1+7.8%)^15=$306,379.1

2. If the weights of stock A is 10%, Stock B is 20%, stock C 50%, stock D is 20%

The annual expected average return=(10%*2%)+(20%*5%)+(50%*9%)+(20%*15%)=8.70%

The investment becomes after 15 years=$100,000*(1+8.70%)^15=$349,496.8

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