6 C You have $250,000 to invest in a stock portfolio. Your choices are Stock H,

Question

6 C You have $250,000 to invest in a stock portfolio. Your choices are Stock H, with an expected return of 12.9 percent, and Stock L, with an expected return of 9.8 percent. If your goal is to create a portfolio with an expected return of 11.1 percent, how much money will you invest in Stock H? In Stock L? 38 Input area: 9 Portfolio value Stock H E(R) Stock L E(R) Portfolio E(R) $250,000 12.90% 9.80% 11.10% 4 L6 Output area: Weight of Stock H Weight of Stock L Dollar in Stock H Dollars in Stock L 0 52 53 4. 5 6

Explanation / Answer

Let investment in H=$x

Hence investment in L=(250,000-x)

Expected return=Respective returns*Respective weights

0.111=(0.129x/250,000)+(0.098*(250,000-x)/250,000)

0.111*250,000=0.129x+24500-0.098x

27750=x(0.129-0.098)+24500

Hence x=investment in H=(27750-24500)/(0.129-0.098)=$104838.71

Hence investment in L=(250,000-104838.71)=$145,161.29

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