You have $21,600 to invest in a stock portfolio. Your choices are Stock X with an expected return of 14.3 percent and Stock Y with an expected return of 8.1 percent. Your goal is to create a portfolio with an expected return of 12.5 percent. All money must be invested. How much will you invest in Stock X?
A) $15,800
B) $18,273
C) $14,600
D) $15,329
E) $19,208

Question

Quizplus · Accepted Answer

To achieve an overall expected return of 12.5% with two stocks having different expected returns, we can use the weighted average formula: $12.5 = x(14.3) + (1-x)(8.1)$, where $x$ is the fraction of the total investment in Stock X. Solving for $x$ gives us the proportion of the total investment that should be in Stock X. Plugging in the numbers and solving for $x$ gives us the proportion of the investment in Stock X. Multiplying this proportion by the total investment amount ($21,600) gives us the amount to invest in Stock X, which is approximately $15,329.

You Have $21,600 to Invest in a Stock Portfolio