You are considering how to invest part of your retirement savings.You have decid

Question

You are considering how to invest part of your retirement savings.You have decided to put $ 100,000 into three stocks: 69 % of the money in GoldFinger (currently $ 20/share), 22 % of the money in Moosehead (currently $ 70/share), and the remainder in Venture Associates (currently $ 7/share). Suppose GoldFinger stock goes up to $ 37/share, Moosehead stock drops to $ 64/share, and Venture Associates stock rises to $ 19 per share.

a. What is the new value of the portfolio?

b. What return did the portfolio earn?

c. If you don't buy or sell any shares after the price change, what are your new portfolio weights?

Explanation / Answer

Total Value of investment = $100,000

Value invested in GoldFinger = $100,000 × 69% = $69,000

Value invested in Moosehead = $100,000 × 22% = $22,000

Value invested in Venture Associates  = $100,000 × 9% = $9,000

Number of stock purchase of GoldFinger = $69,000 / $20

= 3,450

Number of stock purchase of Moosehead = $22,000 / $70

= 314

Number of stock purchase of Venture Associates = $9,000 / $7

= 1,286

a.

Value of new portfolio = (3,450 × $37) + (314 × $64) + (1,286 × $19)

= $127,650 + $20,114 + $24,434

= $172,198

Value of new portfolio is $172,198

b.

Portfolio Return = ($172,198 / $100,000) - 1

= 1.7220 - 1

= 72.20%

Portfolio return is 72.20%.

c.

New Posrtfolio Weight

Weight of Gold finger = $127,650 / $172,198

= 74.13%.

Weight of Moosehead = $20,114 / $172,198

= 11.68%

Weight of Venture Associated = $24,434 / $172,198

= 14.19%.

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