l Verizon LTE 10:59 AM 35%) ezto.mheducation.com E connect Homework k Problems 1
ID: 2613761 • Letter: L
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l Verizon LTE 10:59 AM 35%) ezto.mheducation.com E connect Homework k Problems 12.- You have $260,000 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 11.1 percent If your goal is to create a portfolio with an expected return of 12.5 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.) References Beok& Resoures ???Explanation / Answer
Solution: Investment in H 125,517.24 Investment in L 134,482.76 Working Notes: Expected return of the portfolio = weighted average return of individual stocks Expected return of the portfolio = Er of H x w+ Er of L x (1-w) Let w be the weight of investment in H then investment in L = (1 - w) Erp Expected return of portfolio = 12.5 % ErH Expected return of stock H = 14% ErL Expected return of stock L = 11.1% Expected return of the portfolio = Er of H x w+ Er of L x (1-w) 12.5 % = 14% x w + 11.1% x (1-w) 12.5% = 14% x W + 11.1% - 11.1% x W 12.5% -11.1% = 14% W - 11.1% W 1.4% = 2.9% w w = 1.4/2.9 = 0.48275862 weight of investment in stock H = 0.48275862 weight of investment in stock L = (1-W) = (1- 0.48275862) = 0.51724138 Investment in stock = weight x total amount of investment Investment in stock H = 0.48275862 x 260,000 = 125,517.24 Investment in stock L = 0.51724138 x 260,000 = 134,482.76 Lets check it Expected return of the portfolio = Er of H x125,517.24 + Er of L x 134,482.76 12.5% x 260,000 = 14% x125,517.24 + 11.1% x 134,482.76 32,500 =17,572.41 + 14,927.59 32,500 =32,500 hence our above calculation are correct Please feel free to ask if anything about above solution in comment section of the question.
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