You are considering how to invest part of your retirement savings.You have decid
ID: 2780212 • Letter: Y
Question
You are considering how to invest part of your retirement savings.You have decided to put
$ 600 comma 000$600,000
into three stocks:
64 %64%
of the money in GoldFinger (currently
$ 25$25/share),
21 %21%
of the money in Moosehead (currently
$ 80$80/share),
and the remainder in Venture Associates (currently
$ 3$3/share).
Suppose GoldFinger stock goes up to
$ 38$38/share,
Moosehead stock drops to
$ 68$68/share,
and Venture Associates stock
risesrises
to
$ 11$11
per share.
a. What is the new value of the portfolio?
b. What return did the portfolio earn?
c. If you don't buy or sell any shares after the price change, what are your new portfolio weights?
Explanation / Answer
Total Investment = $600,000
Investment in GoldFinger (64%) = $600,000 * 0.64 = $384,000
Investment in Moosehead (21%) = $600,000 * 0.21 = $126,000
Investment in Venture Associates (15%) = $600,000 * 0.15 = $90,000
Let Pi denote the initial price of the stocks and Pf denote the final price of the stocks.
So,
Pi(Goldfinger) = $25 Pf(Goldfinger) = $38
Pi(Moosehead) = $80 Pf(Moosehead) = $68
Pi(Venture Associates) = $3 Pf(Venture Associates) = $11
Let N denote the number of shares of each stock bought.
So,
N(Goldfinger) = (Investment in GoldFinger stock)/(Price at which GoldFinger stock was bought)
= 384000/25
= 15360 shares
N(Moosehead) = (Investment in Moosehead stock)/(Price at which Moosehead stock was bought)
= 126000/80
= 1575 shares
N(Venture Associates) = (Investment in Venture Associates stock)/(Price at which Venture Associates stock was bought)
= 90000/3
= 30000 shares
Value of GoldFinger stock after price rise = N(GoldFinger) * Pf(GoldFinger)
= 15360 * 38
= $583,680
Value of Moosehead stock after price drop = N(Mossehead) * Pf(Moosehead)
= 1575 * 68
= $107,100
Value of Venture Associates stock after price rise = N(Venture Associates) * Pf(Venture Associates)
= 30000 * 11
= $330,000
Answer a) New value of the portfolio = Value of GoldFinger stock after price rise + Value of Moosehead stock after price drop + Value of Venture Associates stock after price rise
= $583,680 + $107,100 + $330,000
= $1,020,780
Answer b) Return of the portfolio = ((New Value of the Portfolio - Initial Value of the Portfolio) / (Initial Value of the Portfolio)) * 100
= ((1020780 - 600000)/600000) * 100
= 70.13%
Answer c) Because we haven't bought or sold any shares after the price change the new portfolio weights will be given by the the division of the value of a stock after price change by the new value of the portfolio
So,
Portfolio Weight of GoldFinger stock = ((Value of GoldFinger stock after price rise)/(New value of the portfolio)) *100
= ($583,680/$1,020,780) *100
= 57.18%
Portfolio Weight of Moosehead stock=((Value of Moosehead stock after price drop)/(New value of the portfolio))*100
= ($107,100/$1,020,780) *100
= 10.50%
Portfolio Weight of Venture Associates stock = ((Value of Venture Associates stock after price rise)/(New value of the portfolio)) *100
= ($330,000/$1,020,780) *100
= 32.32%
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