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You have $11,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 15 percent and Stock Y with an expected return of 10 percent. Assume your goal is to create a portfolio with an expected return of 13.85 percent. How much money will you invest in Stock X and Stock Y?

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Answer:

  • Invest $8,470 in X
  • Invest $2,530 in Y.

Explanation:

The following expressions can be formed;

Let x and y be the proportions

x + y = 1

0.15x + 0.1y = 13.85%

Expressing y in terms of x;

x + y = 1

y = 100 - x

0.15x + 0.1 ( 1 - x) = 13.85%

0.15x + 0.1 - 0.1x = 13.85%

0.05x = 13.85% - 0.1

x = 13.85%0.05 - 0.1/0.05

x = 77%

Invest 77% in X = 77% * 11,000

= $8,470‬

Invest in Y

= 11,000 - 8,470

= $2,530

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