Question

You have $300,000 to invest in two stocks and want an expected portfolio return of 15%. Stock A has an expected return of 8% and Stock B has an expected return of 21%. How much must you invest in each stock to reach your portfolio return goal?

Answer 1

Given about a portfolio,

expected return on portfolio Rp = 15%

expected return on stock A, Ra = 8%

expected return on stock B, Rb = 21%

Let weight in stock A be W, then weight in stock B is (1-W)

So, using weighted average returns

Rp = Wa*Ra + Wb*Rb

=> 15 = W*8 + (1-W)*21

=> 15 = 8W + 21 -21W

=> 13W = 6

=> W = 6/13 = 0.4615

So, investment in stock A is W*total investment = 0.4615*300000 = $138450

And investment in stock B = total investment - investment in stock A = 300000 - 138450 = $161550