Question

You would like to invest $18,000 and have a portfolio expected return of 12.3 percent. You are considering two securities, A and B. Stock A has an expected return of 15.6 percent and B has an expected return of 10.3 percent. How much should you invest in stock A if you invest the balance in stock B

Answer 1

The amount invested in the Stock A = $ 6792.45

Step-by-step explanation:

Given:

Total amount to invest = $ 18,000

Expected rate of return = 12.3% = 0.123

Return on the stock A = 15.6% = 0.156

Return on the stock B = 10.3% = 0.103

Let the amount invested in stock A be 'x'

thus,

the amount invested in stock B is (18,000 - x)

now,

we can form the relation as:

15.6% of x + 10.3% of (18000 - x) = 12.3% of 18000

thus,

0.156x + 0.103(18000 - x) = 0.123 × 18000

or

0.156x + 1854 - 0.103x = 2214

or

0.053x = 2214 - 1854

or

x = 360 / 0.053

or

x = $ 6792.45

Thus,

the amount invested in the Stock A = $ 6792.45