You have $15,000 to invest and would like to create a portfolio with an expected return...
You have $15,000 to invest and would like to create a portfolio with an expected return of 9.9 percent. You can invest in Stock K with an expected return of 8.4 percent and Stock L with an expected return of 12 percent. How much will you invest in Stock K?
-
$6,250.00
-
$8,020.83
-
$8,333.33
-
$8,750.00
-
$5,468.75
Homework Answers
Let the investment in stock K be x. The total portfolio investment is $15,000. Therefore, the investment in stock L will be ($15,000-X).
The total expected return from portfolio is 9.9% whereas expected returns of stock K and L are 8.4% and 12% respectively. Using the formula of total expected return of a portfolio, we get as follows:
Total expected return= [( Expected return of stock K * weight of stock K in portfolio) + (Expected return of stock L*weight of stock L in portfolio)]/(sum of weights of stock K and stock L)
Replacing the values, we get as follows:-
9.9%= [(8.4%*x) + (12%*(15000-x))]/(x+15000-x)
0.099*15000= 0.084*x + 0.12*15000 - 0.12*x
1485= 0.084x + 1800 - 0.12x
0.12x-0.084x= 1800-1485
0.036x= 315
x= 8750
Therefore, investment in stock K should be $8,750 and the correct option is option D.
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