You have $10,000 to invest in a portfolio and you are considering two stocks (X,

Question

You have $10,000 to invest in a portfolio and you are considering two stocks (X, Y). You want to create a portfolio with an expected return of 12.4%. How much will you invest in each of the stocks if the expected return on X is 14% and the expected return on Y is 11%? You have $10,000 to invest in a portfolio and you are considering two stocks (X, Y). You want to create a portfolio with an expected return of 12.4%. How much will you invest in each of the stocks if the expected return on X is 14% and the expected return on Y is 11%?

Explanation / Answer

Let Investment in stock X be "a" then in stock Y be = (1 - a)

Expected return of portfolio = (Rx * a%) +[Ry * (1- a)]

        .124       = (.14 * a) + [.11 (1 - a) ]

         .124    =   .14 a + [.11 - .11a]

         .124 =    .14 a + .11 - .11a

         .14a -.11a = .124 -.11

         .03a = .014

          a = .014 / .03

             = .4667 or 46.67%

stock X = 46.67%

stock Y =( 1 - .4667 ) = .5333 or 53.33%

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