At the beginning of 2009, an investor created a portfolio consisting of 10 share

Question

At the beginning of 2009, an investor created a portfolio consisting of 10 shares of stock A and 5 shares of stock B, when stock A was trading at $20 per share, and stock B was trading at $40 per share. (Note that at the beginning of 2009, the value of the portfolio was weighted equally between the two stocks.) The investor did not make any trades over the following year, and it is now the beginning of 2010. Stock A is now trading at $50 per share, and stock B is now trading at $20 per share. What trades must the investor make now in order to return to an equally-weighted portfolio?


Answer

Sell 10 shares of stock B and use the proceeds to buy 4 shares of stock A.

Sell 4 shares of stock A and use the proceeds to buy 10 shares of stock B.

No re-balancing is needed, since the portfolio is already equally-weighted.

None of the above.

Explanation / Answer

Sell 4 shares of stock A and use the proceeds to buy 10 shares of stock B.

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