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You would like to invest $20,000 and have a portfolio expected return of 12 percent. You...

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Finance

You would like to invest $20,000 and have a portfolio expectedreturn of 12 percent. You are considering two securities, X and Y.X has an expected return of 20 percent and Y has an expected returnof 10 percent. How much should you invest in stock X if you investthe balance in stock Y to achieve the 12 percent portfolioreturn?

a) $5,500

b)

$4,000

c)

$7,000

d)

$6,250

Answer & Explanation Solved by verified expert
4.3 Ratings (871 Votes)

b)

$4,000

Working:

Step-1:Calculation of weight of each investment
Suppose weight of investment in X is "w" and weight of investment in Y is "1-w".
Portfolio return = sum of weighted return
0.12 = (w*0.20)+((1-w)*0.10)
0.12 = 0.20w+0.10-0.10w
0.12 = 0.10w+0.10
0.02 = 0.10w
w =                0.20
1-w =                0.80
Step-2:Calculation of investment in Stock X
Investment in X = Total investment * Weight of X
= $       20,000 *           0.20
= $         4,000

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Transcribed Image Text

You would like to invest $20,000 and have a portfolio expectedreturn of 12 percent. You are considering two securities, X and Y.X has an expected return of 20 percent and Y has an expected returnof 10 percent. How much should you invest in stock X if you investthe balance in stock Y to achieve the 12 percent portfolioreturn?a) $5,500b)$4,000c)$7,000d)$6,250

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