You have $253,000 to invest in a stock portfolio. Your choices are Stock H, with

Question

You have $253,000 to invest in a stock portfolio. Your choices are Stock H, with an expected return of 14.3 percent, and Stock L, with an expected return of 10.4 percent.

If your goal is to create a portfolio with an expected return of 12.15 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)

If your goal is to create a portfolio with an expected return of 12.15 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)

Explanation / Answer

Total Funds = $253,000

Suppose, Proportion of funds invested in Stock H = (Y)

and, Proportion of funds invested in Stock L = (1 - Y)

Expected Portfolio Return = 12.15 %

Expected Return of Stock H = 14.3 %

Expected Return of Stock L = 10.4 %

Formula for Calculation of Expected Portfolio Return :

Expected Portfolio Return =

[(Proportion of funds invested in Stock H)*(Expected Return of Stock H)] +

[(Proportion of funds invested in Stock L)*(Expected Return of Stock L)]

i.e., 12.15 % = [(Y)*(14.3%)] + [(1 - Y)*(10.4%)]

i.e., 0.1215 = 0.143 Y + 0.104 - 0.104 Y

i.e., 0.039 Y = 0.0175

i.e., Y = 0.44871794871794871794871794871795

So, Proportion of funds invested in Stock H = (Y) = 0.45 (rounded off to two decimal places).

Proportion of funds invested in Stock L = (1 - Y) = 0.55

Investment in Stock H = 45 % of $253,000 = $113,850

Investment in Stock L = 55 % of $253,000 = $139,150

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