Question

Riley Stein estimates the expected returns for Cromarty LTD and Tindall Cos to be 12.3% and 5.2% respectively. She wants to build a portfolio with an expected return of 9.50%. The weight of Cromarty in the portfolio should be:

Answer 1

Answer:

60.56%

Explanation:

Expected return on portfolio is weighted average of return

E(R) = w1 * r1 + w2 * r2

Here, Let assume w1 to be portfolio weight (w2 = 1- w1)

9.50% = w1 * 12.3% + (1 - w1)* 5.2%

9.50% = w1 * 12.3% + 5.2% - w1 * 5.2%

4.30% = 7.10% * w1

w1 = 4.30%/7.10%

w1 = 0.605634

w1 = 60.56%

Hence, the weight of Cromarty in the portfolio should be 60.56%