You have $251,000 to invest in a stock portfolio. Your choices are Stock H, with

Question

You have $251,000 to invest in a stock portfolio. Your choices are Stock H, with an expected return of 14.1 percent, and Stock L, with an expected return of 10.2 percent.

If your goal is to create a portfolio with an expected return of 12.05 percent, how much money will you invest in Stock H and in Stock L? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

You have $251,000 to invest in a stock portfolio. Your choices are Stock H, with an expected return of 14.1 percent, and Stock L, with an expected return of 10.2 percent.

Explanation / Answer

Return on stock H = 14.1% or 0.141

Return on stock L = 10.20% or 0.102

Expected return = 12.05% or 0.1205

Let w1 be the amount to be invested in stock H then (1-w1) will be amount invested in stock L

Given that the expected return on portfolio = 12.05%

0.1205 = w1 * 0.141 + (1-w1) * 0.102

0.1205 = 0.141 * w1 + 0.102 – 0.102 *w1

0.1205 – 0.102 = w1 * (0.141 – 0.102)

0.0185 = w1 * 0.039

Weight of stock H in portfolio = w1 = 0.0185/0.039 = 0.47435 or 0.4744 (rounded off)

Weight of stock L in portfolio w2 = 1- w1 = 1-0.4744 = 0.5256

Amount to be invested in Stock H = $ 251,000 * 0.4744 = $ 119,074.40

Amount to be invested in Stock L = $ 251000 - $ 119074.40 = $ 131,925.60   

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