You have $14,000 to invest in a stock portfolio. Your choices are Stock X with a

Question

You have $14,000 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 9.0 percent. If your goal is to create a portfolio with an expected return of 11.20 percent, how much money will you invest in Stock X and Stock Y?

You have $14,000 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 9.0 percent. If your goal is to create a portfolio with an expected return of 11.20 percent, how much money will you invest in Stock X and Stock Y?

Explanation / Answer

Let us assume the amount invested in stock X is x and then in Y it will be $14,000 -x

Expected return will be sum of weights of each stock multiplied by their exected returns

11.20% = weight of stock X* 13%+weight of stock Y* 9%

11.20% = (x/14,000)13%+(14000-x/14,000)9%

11.20% = 13%x/14,000 - 9%x/14,000 +9%

2.2% = 4%(x/14,000)

Stock X = x = $7,700

Stock Y = $14,000 - $7,700 = $6,300

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