You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 13 percent and Stock Y with an expected return of 8.6 percent. If your goal is to create a portfolio with an expected return of 11.9 percent, how much money will you invest in Stock X?
2500 |
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5000 |
||
7500 |
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7600 |
Let weight of Stock X be x and weight of Stock Y be (1 - x)
Expected Return of Portfolio = Weight of Stock X * Expected
Return of Stock X + Weight of Stock Y * Expected Return of Stock
Y
0.1190 = x * 0.1300 + (1 - x) * 0.0860
0.1190 = x * 0.1300 + 0.0860 - x * 0.0860
0.0330 = x * 0.0440
x = 0.75
Weight of Stock X = 0.75
Weight of Stock Y = 1 - 0.75
Weight of Stock Y = 0.25
Investment in Stock X = 0.75 * $10,000
Investment in Stock X = $7,500
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