In order to expect that it will fund her retirement, Glenda needs her portfolio

Question

In order to expect that it will fund her retirement, Glenda needs her portfolio to have an expected return of 10.0 percent per year over the next 30 years. She has decided to invest in Stocks 1, 2, and 3, with 25 percent in Stock 1, 50 percent in Stock 2, and 25 percent in Stock 3. If Stocks 1 and 2 have expected returns of 9 percent and 10 percent per year, respectively, then what is the minimum expected annual return for Stock 3 that is likely to enable Glenda to achieve her investment requirement? (Round answer to 1 decimal place, e.g. 17.5%.)

Explanation / Answer

Expected return of portfolio of 3 stock = 10%

Suppose Expected return of stock = X

Now,

10% = (25% × 9%) + (50% × 10%) + (25% × X)

10% = 2.25% + 5.00% + (25% × X)

(25% × X) = 10% - 7.25%

X = 2.75% / .25%

X = 11%

minimum expected annual return for Stock 3 would be 11%.

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.