Question

# You have \$20,000 to invest in a stock portfolio. Your choices are Stock X with an...

 You have \$20,000 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 8 percent.

 If your goal is to create a portfolio with an expected return of 10 percent, how much money will you invest in Stock X? \$6,667 \$33,333 \$7,000 \$6,334 \$6,934

 If your goal is to create a portfolio with an expected return of 10 percent, how much money will you invest in Stock Y? \$13,333 \$12,800 \$14,000 \$12,666 \$13,866

We know, expected return of a portfolio is equal to the weighted average of return from various stocks in that portfolio.

As per Question 1, let X be the amount to be invested in Stock X for getting a portfolio return of 10%. Therefore, amount invested in Stock Y= 20,000-X

Stock X return * (X/20,000) + (Stock Y return * ((20,000-X)/20,000) )= 10

Solving for X in the equation, we get X= \$ 6667 (amount to be invested in stock X) Ans A

As per Question 2, amount to be invested in Y for a portfolio return of 10%= 20,000- 6667= \$13,333

If we cross check by the above method, let Y be the amount to be invested in Stock Y for getting a portfolio return of 10%. Therefore, amount invested in Stock X= 20,000-Y

Stock X return * ((20,000-Y) /20,000) + (Stock Y return * Y/20,000 )= 10

Solving for Y in the equation, we get Y= \$  13,333 (amount to be invested in stock Y) Ans A

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