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29 August, 09:38

Returns and Actions Kunal Nayyar from London, had $60,000 in investments in the USA at the beginning of the year that consisted of a diversified portfolio of stocks (40 percent), bonds (40 percent), and cash equivalents (20 percent). His returns over the past 12 months were 14 percent on stocks, 5 percent on bonds, and 1 percent on cash equivalents. What is Kunal's average return for the year? Round your answer to one decimal place. % If Kunal wanted to rebalance his portfolio to its original position, what specific actions should he take?

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  1. 29 August, 10:02
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    Average rate of return is 7.8%, and total amount is $4,680

    If Kunal wanted to rebalance his portfolio to its original position, he needs to transfer $672 ( = $25,872 - $25,200) from stock account to bond account and $816 ( = $12,936 - $12,120) from stock account to cash.

    Explanation:

    Total return for year = 14% * (40% of $60,000) + 5% * (40% of $60,000 + 1% * (20% of $60,000) = $4,680

    Average rate of return = $4,680 / $60,000 = 7.8%

    At beginning, the amount in per diversified portfolio is as below:

    Amount invested in stock = 40% * $60,000 = $24,000 Amount invested in bond = 40% * $60,000 = $24,000 Amount in cash = 20% * $60,000 = $12,000

    After receiving return, the amount in per diversified portfolio is as below:

    Amount invested in stock = $24,000 * (1+14%) = $27,360

    Amount invested in bond = $24,000 * (1+5%) = $25,200 Amount in cash = $12,000 * (1 + 1%) = $12,120

    And amount in Kunal's investment fund = $27,360 + $25,200 + $12,120 = $64,680

    If Kunal wanted to rebalance his portfolio to its original position, the amount in per diversified portfolio is as below:

    Amount invested in stock = 40% * $64,680 = $25,872

    Amount invested in bond = 40% * $64,680 = $25,872 Amount in cash = 20% * $64,680 = $12,936

    ⇒ Kunal needs to transfer $672 ( = $25,872 - $25,200) from stock account to bond account and $816 ( = $12,936 - $12,120) from stock account to cash.
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