You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an...
You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 21.0% and a standard deviation of 40% and T-Bills (e.g., the risk free asset) with an expected return of 5% and a standard deviation of 0%. How much money will you invest in Stock X if your goal is to create a portfolio with an expected return of 26%?
Homework Answers
Portfolio Ret = Weighted Avg ret of securities in that portfolio.
Let X be the weight of stock A & 1-X is weight of stock B.
| Particulars | Weight | Ret | Wtd Ret |
| X | X | 0.21 | 0.21X |
| Y | 1 - X | 0.05 | 0.05 - 0.05X |
| Portfolio Ret | 0.16X + 0.05 | ||
Thus 0.16X + 0.05 = 0.26
0.16X = 0.26-0.05
= 0.21
X = 0.21 / 0.16
= 1.3125
Amount invested in Stock X = 1.3125 * 10000
= $ 13125
Pls comment, if any further assistance is required
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