An investor has $45,000 to invest. He wants to diversify his portfolio by putting dividing the money among stocks, bonds and mutual funds. He has chosen one fund from each type in which to invest. Over the last 10 years the stocks have earned 9.75%, the bonds have earned 5.25% and the mutual fund has earned 7% interest. The investor expects that the funds will all continue to perform in the future similarly to how they have performed over the last ten years. Because he is willing to take some risk, the investor has decided that he will invest twice as much money in stocks as he will in bonds. How much should he invest in each account in order to earn 8% return on his investment?

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Asked Dec 6, 2019
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An investor has $45,000 to invest. He wants to diversify his portfolio by putting dividing the money among stocks, bonds and mutual funds. He has chosen one fund from each type in which to invest. Over the last 10 years the stocks have earned 9.75%, the bonds have earned 5.25% and the mutual fund has earned 7% interest. The investor expects that the funds will all continue to perform in the future similarly to how they have performed over the last ten years. Because he is willing to take some risk, the investor has decided that he will invest twice as much money in stocks as he will in bonds. How much should he invest in each account in order to earn 8% return on his investment?

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Expert Answer

Step 1

Hence, the investment made in bond in $12,000. It is assumed that investment in bonds is X, thus investment in stock is twice of bond which is 2X, and investment in mutual funds is 45000-(X+2X) which is remaining amount of invested money after investing in bonds and stock.

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´Investment in bonds × Interest rate + Investment in stock x Rate of earnings + = Return on investment Investment in mutual funds × Rate of return (X x0.0525+ 2X ×0.0975 + $45,000 - (X+2X)x0.07)= $45,000x 8% 0.0375X+$3,150 = $3,600 Investment in bonds (X)=$12, 000

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Step 2

Hence, investment made in stock is $24,000 which is obtained...

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Investment in stock = 2xInvestment in bonds = 2x $12,000 = $24,000

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