Question

You have $5,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 14 percent and Stock Y with an expected return of 6 percent. If your goal is to create a portfolio with an expected return of 12.2 percent, how much money will you invest in Stock X?

If your goal is to create a portfolio with an expected return of 12.2 percent, how much money will you invest in Stock Y?

Answer 1

Expected return on portfolio is sum of weiaghted average return of its stock
Let us assume weight of stock X is X
therefore weight of stock y = 1-X
equation would be
12.2% =(X*14%) + [6%*(1-X)]
0.122 =0.14X+0.06-.0.06X
0.14X-0.06X =0.122-0.06
0.08X =0.062
X =77.5%
Amount to be invested in X = 77.5%*5000
=$3875
Amount to be invested in Y =$5000-3875
=$1125