18. Tim’s portfolio contains two stocks, lightco an hineco Last year his portfol

Question

18.       Tim’s portfolio contains two stocks, lightco an hineco Last year his portfolio returned 14 percent. Lightco’s return was 5 percent and Shineco returned 20 percent. What are the weights of each in Tim’s portfolio? The following year Tim adds a third stock, Brightco and reallocates his funds among the three stocks. Lightco and Shineco have the same weight in the portfolio, and Brightco’s weight is one-half of Lightco. During the year Lightco returns 10 percent, Shieco returns 12 percent, and Brightco loses 5 percent. What was the return his portifolio?

Explanation / Answer

Let the weight of Lighco’s be A, so the weight of Shineco would be 1-A

.14 = A*.05 + .2(1-A)

.14 = .05A +.2 - .2A

.14 = -.15A +.2

.15A = .06

A = .06/.15

A = 0.4 or 40%

So the weight of Lightco’s would be 40% and for Shineco it would be 60%.

Now in the second situation we have

Lightco and Shineco have the same weight in the portfolio, and Brightco’s weight is one-half of Lightco.

So the proportion would be as follows:

Lightco = 40%

Shineco = 40%

Brightco’s = 20%

Return on the portfolio would be

0.4*0.1 + 0.1*0.12 + 0.2*-0.05 = 0.078 or 7.8%

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.