Diversifying Portfolios An investor decides to create a portfolio that initially
ID: 2761867 • Letter: D
Question
Diversifying Portfolios An investor decides to create a portfolio that initially will contain two stocks: Wal-Mart and Viacom. He expects the Wal-Mart stock to have an annual return of 10% and the Viacom stock to have an annual return of 15%. If he invests equally in both stocks, what will be his expected annual return on the portfolio? How should he divide his investment in order to realize an annual return of 14% on his portfolio! Diversifying Portfolios An investor decides to create a portfolio that initially will contain four stocks: Boeing, Apple Computers, Aetna, and Caterpillar. She expects the Boeing stock to have an annual return of 25%, the Apple Computers stock to have an annual return of 18%, the Aetna stock to have an annual return of 8%, and the Caterpillar stock to have an annual return of 10%. If she invests equally in all stocks, what will be her expected annual return on the portfolio? If she wants to keep half her investment evenly split between Apple Computer and Aetna, how should she divide the remaining half of her investment between the other two stocks in order to realize an annual return of 17.75% on her portfolio? Discussion and Writing Make up a game different than any given in the text that is favorable to the player. Look up the rules for a lottery and discuss the expected value of a ticket. Refer to Example 8. As manager, would you have 11 or 12 luxury cars available to rent? Provide a rationale for your decision. Notice that the 12th car only generates $1 more in profit than the 11 cars do.Explanation / Answer
Let us assume the investor has $ 1000 as per the problem invests in following stocks
Apple computer 25% of total investment that will be $250 and return is 18%
Arena 25% of total investment that will be $250 and return is 8%
Balance between Boeing and caterpillar
The required return on total investment is 17.75% in value terms it will be
= 1,000 * 17.75%
= $177.50
The expected returns in value terms on investment in Apple computer and Arena will be
= 250 * 18% + 250* 8%
= 45 + 20
=$65
The required return in value terms on balance investment of $500 in Boeing and caterpillar will be
= $177.50 - $65
= $112.50
The return of Boeing is given in the problem @ 25% and in caterpillar is 10%. The amount to be invested in Boeing and caterpillar to achieve return in value term of $112.50 and has a constraint of $500 be invested
$112 .50 = B * 25% + C * 10%
Where B = boeing invest amount
C= caterpillar investment amount
112.50 = 416 .7 * 25% + 83.30 * 10%
112.50 = 104.175 + 8.33
112.50 = 112.50
The investment to be made in boeing is $416.70 and in caterpillar is $83.30 to get an overall portfolio return of 17.75%