You have $254,000 to invest in a stock portfolio. Your choices are Stock H, with

Question

You have $254,000 to invest in a stock portfolio. Your choices are Stock H, with an expected return of 14.4 percent, and Stock L, with an expected return of 10.5 percent.

If your goal is to create a portfolio with an expected return of 12.2 percent, how much money will you invest in Stock H and in Stock L? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

You have $254,000 to invest in a stock portfolio. Your choices are Stock H, with an expected return of 14.4 percent, and Stock L, with an expected return of 10.5 percent.

Explanation / Answer

Calculation of Amount to be invested in the stocks:

Expected Return from portfolio = 12.20%

Stock H Return = 14.4%

Stock L Return = 10.5%

Lets say weight of stock H is X, so the weight for Stock L shall be (1-X)

Expected return of the portfolio = (Stock H Return * weight of Stock H) + (Stock L Return * weight of Stock L)

So,

12.20% = (14.4% * X) + (10.5%*(1-X)

0.122 = 0.144 X + 0.105 - 0.105 X

0.122 – 0.105 = 0.039 X

X = 0.017 / 0.039 = 0.435897

Hence weight for Stock H shall be = 0.435897

And weight for stcok L = 1- 0.435897 =0.564103

Total Amount to be invested in the portfolio = $254000

Hence ,

Investment in Stock H = 254000 * 0.435897 = $110717.84

Investment in Stock L =254000 * 0.564103 = $143282.16

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