Question

4. Portfolio Expected Return (L01) You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 11.5 percent and Stock Y with an expected return of 9.4 percent. If your goal is to create a portfolio with an expected return of 10.85 percent, how much money will you invest in Stock X? In Stock Y?

Answer 1

Since the total weight of a portfolio must equal 1 (100%), the weight of Stock Y mustbe one minus the weight of Stock X. Mathematically speaking, this means:

E(RP) = .1085 = .115wX + .094(1 – wX)

.1085 = .115wX + .094 – .094wX

.0145 = .021wX

wX = 0.69

So, the dollar amount invested in Stock X is the weight of Stock X times the total portfolio value, or:

Investment in X = 0.69 ($10,000) = $6,900

And the dollar amount invested in Stock Y is:

Investment in Y = (1 – 0.69)($10,000) = $3,100