Question

You have $260,000 to invest in a stock portfolio. Your choices are Stock H, with an expected return of 14 percent, and Stock L, with an expected return of 11.1 percent. If your goal is to create a portfolio with an expected return of 12.5 percent, how much money will you invest in Stock H and in Stock L? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Answer 1

Let investment in H=$x

Hence investment in L=(260,000-x)

Portfolio return=Respective return*Respective weights

12.5=(x/260,000*14)+(260,000-x)/260,000*11.1

(12.5*260,000)=14x+(260,000-x)*11.1

3,250,000=14x+2,886,000-11.1x

x=(3,250,000-2,886,000)/(14-11.1)

=$125,517.24=investment in H(Approx).

Hence investment in L=(260,000-125517.24)=$134482.76(Approx).