Question

You have $21,600 to invest in a stock portfolio. Your choices are Stock X with an expected return of 14.3 percent and Stock Y with an expected return of 8.1 percent. Your goal is to create a portfolio with an expected return of 12.5 percent. All money must be invested. How much will you invest in Stock X? Select one: a. $18,273 b. $19,208 c. $14,600 d. $15,800 e. $15,329

Answer 1

Answer:

e. $15,329

Explanation:

Total amount = 21,600

weight of stock X = wX

weight of stock Y = (1-wX)

Stock X return (rX) = 14.3% or 0.143 as a decimal

Stock Y return (rY) = 8.1% or 0.081 ''  "

Portfolio return (rP ) = 12.5% or 0.125  " "

Portfolio return = wX*rX + wY*rY

rP = (wX* 0.143) + (1-wX)*0.081

0.125 = 0.143wX + 0.081 - 0.081wX

0.125 - 0.081 =0.062wX

0.044 = 0.062wX

Divide both sides by 0.062 to solve for weight of X; wX

wX =0.7097 or 70.97%

To find the amount invested in stock X , multiply the above percentage by the total available amount;

=0.7097 *21,600

= $15,329.52