Question

You have $265,000 to invest in a stock portfolio. Your choices are Stock H, with an expected return of 14 percent, and Stock L, with an expected return of 11.6 percent.

If your goal is to create a portfolio with an expected return of 12.75 percent, how much money will you invest in Stock H and in Stock L? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Investment in Stock H		$
Investment in Stock L		$

Answer 1

Expected return of a portfolio is weighted average return of inidivual stocks. Mathematically,

Now, for this question, assume weight of investment in stock H is p and that in stock L is q.

p + q = 1.

Now, with the information given in question:

But q = 1 - p

0.1275 = 0.14p + 0.116 - 0.116p

0.1275 = 0.024p + 0.116

p = 0.4792 = 47.92%

Hence, q = 1 - p = 52.08%

=> For a total investment of $265,000, 47.92% should be in stock H and 52.08% in stock L.

Stock H investment = 265,000 * 47.92% = $126,979.17

Stock L investment = 265,000 * 52.08% = $138,020.83