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You have $100,000 to invest in either Stock D, Stock F, or a risk-free asset
You have $100,000 to invest in either Stock D, Stock F, or a risk-free asset. You must invest all of your money. Your goal is to create portfolio that has an expected return of 12 percent. Assume D has an expected return of 15.5 percent, F has an expected return of 11.4 percent, and the risk-free rate is 6.25 percent. If you invest $50,000 in Stock D, how much will you invest in Stock F? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Expert Solution
Computation of Amount of Stock F to Buy:
Portfolio expected return = 12%
Portfolio after investing
Investment in Stock = $50,000, Let investment stock F = F, Investment in risk free assets = R
$50,000 + F + R = $100,000
R = $50,000 - F
Expected portfolio after 1 year
50,000*(1+15.5%) + F * (1 + 11.4%) + R*(1 + 6.25%) = 100,000*(1+12%)
57,750 + F * 1.114 + (50,000 - F)* 1.0625 = 112,000
57,750 + F *1.114 + 53,125 - F*1.0625 = 112,000
110,875 + F*0.0515 = 112,000
F*0.0515 = 112,000-110,875
F = 1,125/0.0515
F = 21,844.66
So we invest 21,844.66 in Stock F.
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