You have $28,000 to invest in a stock portfolio. Your choices are Stock X with a

Question

You have $28,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 13 percent and Stock Y with an expected return of 10.0 percent. If your goal is to create a portfolio with an expected return of 12.07 percent, how much money will you invest in Stock X and Stock Y?

You have $28,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 13 percent and Stock Y with an expected return of 10.0 percent. If your goal is to create a portfolio with an expected return of 12.07 percent, how much money will you invest in Stock X and Stock Y?

Explanation / Answer

Let the percentage of amount to be invested in stock X be a Z then percentage of amount to be invested in stock Y would be (1 - Z). Expeted return of the portfolio is the weighted average return of the stock contained in it. As per question,

12.07 = 13Z + 10(1-Z)

12.07 = 13Z + 10 - 10Z

2.07 = 3Z

Z = 0.69

Thus, 69% should be invested in Stock X and 31% in Stock Y.

Amount to be invested in Stock X = 28,000 x 69% = $19,320
Amount to be invested in Stock Y = 28,000 x 31% = $8,680

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