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Question
You have $13,000 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 9 percent. Assume your goal is to create a portfolio with an expected return of 12.35 percent.
Required:
How much money will you invest in Stock X and Stock Y? (Do not round intermediate calculations.Round your answers to 2 decimal places (e.g., 32.16).)
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Answer:
To earn an expected return of 12.35% we must invest as follows;
Suppose we invest x% of $ 13,000 in Stock X and (1-x)% of $ 13,000 in Stock Y; then according to question
9% of 13,000x + 15% of 13,000 (1-x) = 12.35% of 13,000
0.09 x 13000x + 0.15 x (13,000 - 13,000x) = 1605.50
1,170x + 1,950 - 1,950x = 1605.50
x = 0.378205 or 37.8205% to be invested in Stock X
and, 1 - x = 1 - 0.378205 = 0.621795 or 62.1795% to be invested in Stock Y
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This was wrong per my homework. they have x =$7,258.33 and Y= $5,741.67 I am lost at the part of (13,000- 13,000x) Then 1,950-1950x ...should that equal zero? I am so lost on this. Please explain futher
You have $13,000 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 9 percent. Assume your goal is to create a portfolio with an expected return of 12.35 percent.
Explanation / Answer
Expected return is 12.35% i.e. 13000*12.35% = $1605.5
Therefore,
Suppose amount invested in stock X is 'x' and therefore in Stock Y is (13000-x)
Therefore
1605.5 = 0.15x + 0.09(13000-x)
1605.5 = 0.15x + 1170 - 0.09x
435.5 = 0.06x
Therefore x i.e. invest in stock x = $7258.33
y i.e. invest in stock y = $13000 - $7258.33 = $5741.67
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