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4 October, 16:58

You would like to invest $20,000 and have a portfolio expected return of 14 percent. You are considering two securities, M and N. M has an expected return of 20 percent and N has an expected return of 10 percent. How much should you invest in stock M if you invest the balance in stock N to achieve the 14 percent portfolio return?

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  1. 4 October, 17:25
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    The amount invested in M = $8,000

    The amount invested in N = $12,000

    Explanation:

    Data provided in the question:

    Total amount invested = $20,000

    Expected return on portfolio = 14%

    Expected return on M = 20% = 0.20

    Expected return on N = 10% = 0.10

    Now,

    Let the amount invested in M be 'x'

    thus,

    Amount invested in N will be = $20,000 - x

    Thus,

    According to the question

    0.20 (x) + 0.10 ($20,000 - x) = 0.14 ($20,000)

    or

    0.20x + $2,000 - 0.10x = $2,800

    or

    0.10x = $800

    or

    x = $8,000

    Therefore,

    Amount invested in N will be = $20,000 - $8,000

    = $12,000

    Hence,

    The amount invested in M = $8,000

    The amount invested in N = $12,000
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