Question

Stock A had an expected return of 20% and Stock B has an expected return of 10%. If you have $150,000, how much should you invest in Stock A if you want your portfolio to return 17%?

Answer 1

Solution:
	Stock A if you want your portfolio to return 17%		$105,000
Working Notes:
	Expected return of porfolio = Weighted average return of individual assets
	let W be the weight invested in Stock A , so weight of investment in B is (1-W)
	Expected return of porfolio = Weighted average return of individual assets
	ErP = W x rA + (1-W) x rB
	17% = W x 20% + (1-W) x 10%
	17% = 20% W + 10% - 10% W
	7% = 10% w
	W = 7/10
	W=0.70
	W =70%
	Amount invested in stock A = 70% x $150,000
	Amount invested in stock A =$105,000
	Amount invested in stock B =$150,000 - $105,000
	Amount invested in stock B =$45,000
Please feel free to ask if anything about above solution in comment section of the question.