You are considering how to invest part of your retirement savings. You have decided to put $200,000 into three stocks: 50% of the money in Goldfinger (currently $25/share). 25% of the money in Moosehead (currently $80/share). and the remainder in Venture Associates (currently $2/share). If Goldfinger stock goes up to $30/share. Moosehead stock drops to $60/share, and Venture Associates stock rises to $3 per share.
- a. What is the new value of the portfolio?
- b. What return did the portfolio earn?
- c. If you don’t buy or sell shares after the price change, what are your new portfolio weights?
a)
To determine: The new value of the portfolio.
Introduction:
Portfolio refers to a set of financial investments owned by an investor. The portfolio of investments includes debentures, stocks, bonds, and mutual funds.
Answer to Problem 1P
The new value of the portfolio is $232,500.
Explanation of Solution
Given information:
Person X has decided to investment $200,000 in three stocks. He decided to put 50 percent of $200,000 in GF Company, 25 percent of $200,000 in MH Company, and the remaining 25 percent of $200,000 in VT Associates.
The current share price of GF Company is $25 per share, the current share price of MH Company is $80 per share, and the current share price of VT Associates is $2 per share. Assume that GF Company’s stock rises by $30 per share, VT Associates’ stock even goes up to $3 per share, and MH Company’s stock falls by $60 per share.
The formula to calculate the number of shares in a particular stock:
The formula to calculate the new value of the portfolio:
Calculate the number of shares of GF Company:
Hence, the number of shares of GF Company is 4,000.
Calculate the number of shares of MH Company:
Hence, the number of shares of MH Company is 625.
Calculate the number of shares of VT Associates:
Hence, the number of shares of VT Associates is 25,000.
Compute the new value of the portfolio:
Hence, the new value of the portfolio is $232,500.
b)
To determine: The return from the portfolio.
Introduction:
Return is a loss or gain incurred on the investment made by the investors. It is expressed in terms of percentage.
Answer to Problem 1P
The return from the portfolio is 16.25%.
Explanation of Solution
Given information:
Person X has decided to investment $200,000 in three stocks.
The formula to compute the return from the portfolio:
Compute the return from the portfolio:
Hence, the return from the portfolio is 16.25%.
c)
To determine: The new portfolio weights.
Introduction:
Portfolio weight refers to the share of each financial investment in a portfolio. It refers to a portion of the total value of portfolio that represents a particular asset in the portfolio.
Answer to Problem 1P
The new portfolio weight of GF Company is 51.61%.
The new portfolio weight of MH Company is 16.13%.
The new portfolio weight of VT Associates is 32.26%.
Explanation of Solution
Given information:
Person X has decided to investment $200,000 in three stocks. He decided to put 50 percent of $200,000 in GF Company, 25 percent of $200,000 in MH Company, and the remaining 25 percent of $200,000 in VT Associates.
The current share price of GF Company is $25 per share, the current share price of MH Company is $80 per share, and the current share price of VT Associates is $2 per share. Assume that GF Company’s stock rises by $30 per share, VT Associates’ stock even goes up to $3 per share, and MH Company’s stock falls by $60 per share.
The formula to compute the portfolio weights:
Compute the portfolio weight of GF Company:
Hence, the new portfolio weight of GF Company is 51.61%.
Compute the portfolio weight of MH Company:
Hence, the new portfolio weight of MH Company is 16.13%.
Compute the portfolio weight of VT Associates:
Hence, the new portfolio weight of VT Associates is 32.26%.
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