Intro You've assembled the following portfolio: Stock Expected return Portfolio weight 1 9.8% 30% 2 12% 3 16...
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%?
Homework Answers
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
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