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