A portfolio has an expected return of 12.3 percent. This portfolio contains two stocks and one risk-free security. The expected return on stock X is 9.7 percent and on stock Y it is 17.7 percent. The risk-free rate is 3.8 percent. The portfolio value is $78,000 of which $18,000 is the risk-free security. How much is invested in stock X?
A) $18,600
B) $19,667
C) $21,375
D) $22,204
E) $24,800

Question

Quizplus · Accepted Answer

The total investment in stocks is $60,000 ($78,000 - $18,000). Let x be the amount invested in stock X. The expected return equation is: 0.123 = (18,000/78,000)*0.038 + (x/60,000)*0.097 + ((60,000-x)/60,000)*0.177. Solving for x gives $21,375.

A Portfolio Has an Expected Return of 12