You have $269,000 to invest in a stock portfolio. Your choices are Stock H, with

Question

You have $269,000 to invest in a stock portfolio. Your choices are Stock H, with an expected return of 14.4 percent, and Stock L, with an expected return of 12 percent.

If your goal is to create a portfolio with an expected return of 12.95 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.

You have $269,000 to invest in a stock portfolio. Your choices are Stock H, with an expected return of 14.4 percent, and Stock L, with an expected return of 12 percent.

Explanation / Answer

Solution:

Let assume weight of Stock L in portfolio = W

So, the weight of Stock H in portfolio = 1 – W

Portfolio Expected Return = (Expected Return of Stock L x Weight of Stock L) + (Expected Return of Stock H x Weight of Stock H)

12.95% = (12% x W) + [14.40% x (1-W)]

Or

0.1295 = 0.12W + 0.144 – 0.144W

0.1295 – 0.144 = 0.12W – 0.144W

0.0145 = 0.024W

W = 0.60

To create a portfolio with an expected return of 12.95%, the weight of stock should be as follows:

Weight of Stock L in portfolio = 0.60

And Weight of Stock H in portfolio = 1 – 0.6 = 0.4

Investment in Stock H = $269,000 x 0.4 = $107,600

Investment in Stock L = $269,000 x 0.6 = $161,400

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