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19 October, 09:28

You have $250,000 to invest in a stock portfolio. Your choices are Stock H, with an expected return of 12.9 percent, and Stock L, with an expected return of 9.8 percent. If your goal is to create a portfolio with an expected return of 11.1 percent, how much money will you invest in Stock H? In Stock L?

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  1. 19 October, 09:54
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    The investment in stock H will be $104837.5 while the investment in stock L will be $145162.5

    Explanation:

    The portfolio return is the weighted average return of the individual stocks that form up the portfolio. The weightage of each stock in the portfolio is the investment in a stock as a proportion of investment in the portfolio.

    Let x be the weightage of Stock H.

    Weightage of Stock L will be (1-x).

    Portfolio return = wH * rH + wL * rL

    Plugging in the values,

    0.111 = x * 0.129 + (1-x) * 0.098

    0.111 = 0.129x + 0.098 - 0.098x

    0.111 - 0.098 = 0.031x

    0.013 / 0.031 = x

    x = 0.41935 or 41.935% rounded off to 3 decimal places

    (1-x) = 1 - 0.41935 = 0.58065 or 58.065%

    Investment in Stock H = 250000 * 41.935% = $104837.5

    Investment in Stock L = 250000 * 58.065% = $145162.5
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