Question

You have $25,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 13 percent and Stock Y with an expected return of 8 percent.

   

Required:

(a)	If your goal is to create a portfolio with an expected return of 11.9 percent, how much money will you invest in Stock X?
	(Click to select)$20,280$18,525$59,500$19,500$20,475

  

(b)	If your goal is to create a portfolio with an expected return of 11.9 percent, how much money will you invest in Stock Y?
	(Click to select)$5,225$5,500$5,720$5,280$5,775

Answer 1

Weight of Stock X = x
Weight of Stock Y = 1-x
Return on Stock X = 13%
Return on Stock Y = 8%
Return on Portfolio = 11.90%

Return on Portfolio = Weight of Stock X* Return on Stock X + Weight of Stock Y* Return on Stock Y
11.90% = x*13% + (1-x)*8%
0.1190 = 0.13x + 0.08 - 0.08x
0.0390 = 0.05x
x = 0.78

Weight of Stock X = 0.78
Investment in Stock X = 0.78 * $25,000
Investment in Stock X = $19,500

Weight of Stock Y = 1 - 0.78 = 0.22
Investment in Stock Y = 0.22 * $25,000
Investment in Stock Y = $5,500