Question

You have $19661 to invest in a stock portfolio. Your choices are Stock X with an expected return of 13.19 percent and Stock Y with an expected return of 8.4 percent. If your goal is to create a portfolio with an expected return of 11.68 percent, how much money (in $) will you invest in Stock X?

Answer 1

Let expected investment in stock X be A

Now, total portfolio is consisting of Stock X and Stock Y only, so, sum of weight of both in the portfolio will be 1

So, X + Y = 1

So, Y = 1 – X

Now, expected return of a portfolio is the weighted average of returns of the stock of the portfolio

= Weight of X x Return on X + Weight of Y x Return on Y

So, 11.68 = X x 13.19 + (1 – X) x 8.4

So, 13.19 X + 8.4 – 8.4 X = 11.68

So, 4.79 X = 11.68 – 8.4

So, X = 3.28 / 4.79

= 0.68 or 68%

So, amount to be invested in stock X

= Total investment x 68%

= $19,661 x 68%

= $ 13,369.48