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 6 percent. If your goal is to create a portfolio with an expected return of 11.3 percent, you will invest $ in Stock X and $ 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 6 percent. If your goal is to create a portfolio with an expected return of 11.3 percent, you will invest $ in Stock X and $ in Stock Y.

Explanation / Answer

Let investment weight in X=$x

Hence investment weight in Y=(10,000-x)

Expected return=Respective returns*Respective investment weights

0.113=(x/10,000*0.14)+(10,000-x)/10,000*0.06

(0.113*10,000)=0.14x+600-0.06x

1130=0.14x+600-0.06x

Hence x=(1130-600)/(0.14-0.06)=$6625

Hence investment in X=$6625

Y=(10,000-6625)=$3375

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