You have $20,000 to invest in a stock portfolio. Your choices are Stock X with a

Question

You have $20,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 13 percent and Stock Y with an expected return of 6 percent. Your goal is to create a portfolio with an expected return of 11 percent.

How much money will you invest in Stock? In Stock Y?

You have $20,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 13 percent and Stock Y with an expected return of 6 percent. Your goal is to create a portfolio with an expected return of 11 percent.

Explanation / Answer

let us invest x amount of money in stock X and ( $20,000 - x) in stock Y.

the portfolio return = weight in stock X * return in stock X + weight in stock Y* return in stock Y

= X * 0.13 + (1 - X ) 0.06 = 0.11

= 0.13 X + 0.06 - 0.06X = 0.11

=0.07 X = 0.05

X = 71.43%

AS THE TOTAL INVESTMENT AMOUNT IS 20,000,

THE AMOUNT INVESTED IN STOCK X = $14,286

AND THE AMOUNT INVESTED IN STOCK Y IS = $5714 ($20,000 - $14,286)

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