Question

You would like to invest $24,000 and have a portfolio expected return of 11.5 percent. You are considering two securities, A and B. Stock A has an expected return of 18.6 percent and B has an expected return of 7.4 percent. Approximately how much should you invest in Stock A if you invest the balance in Stock B? a) $7,137 b) $7,411 c) $8,786 d) $8,626 e) $7,807

Answer 1

Answer:

c) $8,786

Explanation:

0.186A + 0.074B = (24,000 x 0.115)

0.186A + 0.074B = 2,760

A + B = 24,000

where A = amount invested in stock A and B = amount invested in stock B

A = 24,000 - B

0.186(24,000 - B) + 0.074B = 2,760

4,464 - 0.186B + 0.074B = 2,760

4,464 - 0.112B = 2,760

4,464 - 2,760 = 0.112B

1,704 = 0.112B

B = 1,704 / 0.112 = $15,214.29

A = $24,000 - $15,214.29 = $8,785.71 ≈ $8,786