You have $100,000 to invest in either Stock D, Stock F, or a risk-free asset. Yo

Question

You have $100,000 to invest in either Stock D, Stock F, or a risk-free asset. You must invest all of your money. Your goal is to create a portfolio that has an expected return of 11.2 percent. Assume D has an expected return of 14.7 percent, F has an expected return of 10.6 percent, and the risk-free rate is 5.85 percent.

equired:

If you invest $50,000 in Stock D, how much will you invest in Stock F? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

equired:

If you invest $50,000 in Stock D, how much will you invest in Stock F? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Explanation / Answer

The portfolio after investing is:-

let investment in stock D is "D"

same way, stock F is "F"

Risk free return is "R"

based on investements, we derive a equation=D+F+R=$100,000

=$50,000+F+R=$100,000

=F+R = $100,000-$50,000=$50,000

F=$50,000-R

The expected return is:

50,000 * 1.147 + F * 1.106 + R*1.0585 = $100,000 * 1.112

57,350 + 1.106F + 1.0585R = 111,200

1.106(50,000-R) + 1.0585R = 111,200-57,350=53,850

55,300-1.106R+1.0585R=53,850

55,300-53,850 = 1.106R-1.0585R

0.0475R = 1450

R=1450/0.0475 = $30,526.32

F=$50,000 - $30,526.32 = $19,473.68

The amount you have to invest in stock F is =$19,473.68

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