You have $10,000 to invest in a stock portfolio. Your choices are Stock X with a

Question

You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 14 percent and Stock Y with an expected return of 9 percent.

If your goal is to create a portfolio with an expected return of 11.2 percent, how much money will you invest in Stock X?

If your goal is to create a portfolio with an expected return of 11.2 percent, how much money will you invest in Stock Y?

You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 14 percent and Stock Y with an expected return of 9 percent.

Explanation / Answer

Total value to invest = $10,000

Return on stock X = 14%

Return on stock Y = 9%

Expected return = 11.2%

Dollar value of expected return = $10,000 × 11.20%

                                                   = $1,120

Let’s Assume investor has invested X amount in stock X and ($10,000 – X) Amount in stock Y.

So,

$1,120 = 14% × X + ($10,000 – X) × 9%

5% × X = $1,120 - $900

             X = $4,400

So total money invested in stock X is $4,400.

Total amount invested in stock Y = $10,000 - $4,400

                                                       = $5,600

Hence, Total amount invested in stock X is $4,400 and stock Y is $5,600.

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