Question

You have $20,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 12.5 percent and Stock Y with an expected return of 9.5 percent. Assume your goal is to create a portfolio with an expected return of 11.2 percent. How much money will you invest in Stock X and Stock Y?

Answer #1

Calculation of money that is invested in stock X and stock Y

Given values in the above question

The expected return of the portfolio = 11.2% or.112

The expected return of stock X = 12.5% or .125

The expected return of stock Y = 9.5% or. 095

Let assume the total weight of a portfolio = 1(100%)

The weight of the stock Y must be one minus the weight of stock X.

E(Rp)=

.112 = 0.125wx + .095(1-Wx)

By solving the equation

.112 = .125Wx + .095 - .095Wx

.112 -.095 = 0.125Wx - .095Wx

.017 = .03Wx

Wx = 0.017/ .03

Wx =.5667

Hence money invested in stock X =.5667* $20000 = $11333

And money invested in stock Y = (1-.5667) = .4333

Hence, .4333^ $20000 = $8667

The money you invest in stock X = $11333

The money you invest in stock Y = $8667

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