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? 

If your goal is to create a portfolio with an expected return of 10 percent, how much money will you invest in Stock Y? 

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= 20,000X
Stock X return * (X/20,000) + (Stock Y return * ((20,000X)/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= 20,000Y
Stock X return * ((20,000Y) /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
Get Answers For Free
Most questions answered within 1 hours.