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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?
Portfolio expected return= 12.3% Portfolio expected return = (Expected return of stock A * Weight of stock A + Expected return of stock B * Weight of stock B) Here total investment is \$18000, so let us assume that investment in stock A is X, while investment in stock B is (18000-X) So, Weight of stock of A = X/18000; Weight of stock of B = (18000-X/18000) 0.123= 0.156 (X/18) +…

0.103 (18-X/18) [weight of stocks are in 000s] 0.123=0.0087X + 0.103 (1-0.056X) 0.123=0.0087X – 0.0057X + 0.103 0.02 = 0.003X X= 6.667 [weight of stocks are in 000s] Weight of stock A = X= \$6667 Weight of stock B = \$18000-\$6667 = \$11,333

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