Question

Intro

You've assembled the following portfolio:

Stock	Expected return	Portfolio weight
1	9.8%	30%
2	12%
3	16.8%

Part 1

What is the weight for stock 3 if you want to achieve an expected portfolio return of 14%?

Answer 1

Let the weight of stock 3 be y

Then,

Portfolio return = Expected return on Stock 1 x Weight of stock 1 + Expected return on Stock 2 x ( 1 - 0.3 - y ) + Expected return on Stock 3 x y

0.14 = 0.098 x 0.30 + 0.12 x ( 0.7 - y ) + 0.168 x y

Solving for y, we shall get

0.5542 Approximately

Thus the weight of stock 3 is 0.5541 or 55.42%

Feel free to ask in case of any query relating to this question