You have $16,000 to invest in a stock portfolio. Your choices are Stock X with a

Question

You have $16,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 16 percent and Stock Y with an expected return of 10 percent. Assume your goal is to create a portfolio with an expected return of 13.50 percent.

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).)

You have $16,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 16 percent and Stock Y with an expected return of 10 percent. Assume your goal is to create a portfolio with an expected return of 13.50 percent.

Explanation / Answer

Expected Return of Portfolio = Weight of Stock X * Expected return of Stock X + Weight of Stock Y * Expected return of Stock Y

Let Weight of Stock X be a

Weight of Stock y =1-a

Expected Return of Portfolio = a*16 + (1-a)*10

13.50 = 16a -10a +10

6a = 3.50

a = 3.50/6

a = 58.33%

Weight of Stock X = 58.333333%

Weight of Stock y = 41.666667%

Investment in Stock x = 16000*58.333333% = $ 9333.33

Investment in Stock y = $ 6,666.67

Answer

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