You have $20,000 to invest in a stock portfolio. Your choices are Stock X with a

Question

You have $20,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 15 percent and Stock Y with an expected return of 8 percent.

(a) If your goal is to create a portfolio with an expected return of 12.2 percent, how much money will you invest in Stock X?

If your goal is to create a portfolio with an expected return of 12.2 percent, how much money will you invest in Stock Y?

If your goal is to create a portfolio with an expected return of 12.2 percent, how much money will you invest in Stock Y?

Explanation / Answer

Expected Return=WxRx + WyRy

.122=Wx .15+ Wy.08, Wx + Wy=1

.122=Wx .15+ (1-Wx).08

.122=Wx.15+.08-.08Wx

.122-.08=.07Wx

.0420/.07=Wx

Wx=.60 or 60%

Money invested in X=$12000, ($20000x.60)

Money invested in Y=$8000, ($20000x.40) since Wx + Wy=1

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