Aibell would like to invest $14,000 and have a portfolio expected return of 10.75 percent. She...
Aibell would like to invest $14,000 and have a portfolio expected return of 10.75 percent. She is considering two securities, A and B. A has an expected return of 13.61 percent and B has an expected return of 8.74 percent. How much should she invest in stock A if you invest the balance in stock B?
Homework Answers
The return of a portfolio is the weighted average return of the securities which constitute the porfolio
Let weight of Stock A be x.
| Stock | Weight | Expected Return (%) | Weight*Expected Return |
| A | x | 13.61 | 13.61x |
| B | 1-x | 8.74 | 8.74*(1-x) |
Portfolio Return = Weight*Expected
Return
10.75 = 13.61x + 8.74 - 8.74x
13.61x- 8.74x = 10.75-8.74
4.87x = 2.01
x = 2.01/4.87
= 0.41273100616
weight of Stock A = 41.27%
weight of Stock B = 58.73%
Amount invested in Stock A = 14000*41.27%
= 5777.80
Amount invested in Stock B = 14000-Amount invested in Stock A
= 14000-5777.80
= 8222.20
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