You are considering how to invest part of your retirement savings.You have decided to put $300,000
into three stocks: 55%
of the money in GoldFinger (currently $27/share), 30% of the money in Moosehead (currently $83/share),
and the remainder in Venture Associates (currently$4/share).
If GoldFinger stock goes up to $44/share,
Moosehead stock drops to $51/share, and Venture Associates stock rises to $6 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 any shares after the price change, what are your new portfolio weights?
Investing wisely is crucial when it comes to securing one’s financial future, especially during retirement. In this scenario, we will examine an individual who has decided to invest $300,000 into three different stocks – GoldFinger, Moosehead, and Venture Associates. We will analyze the impact of price fluctuations on these stocks and evaluate the new value of the portfolio, the portfolio’s return, and the updated portfolio weights.
a. New Portfolio Value: To calculate the new value of the portfolio after the stock price changes, we need to consider the initial allocation and the new stock prices. Here’s how we calculate it:
GoldFinger: Initially, 55% of the portfolio was invested in GoldFinger at $27/share. After the price increase to $44/share, the value of this portion is 0.55 * $44 = $24.20K.
Moosehead: Initially, 30% of the portfolio was invested in Moosehead at $83/share. After the price drop to $51/share, the value of this portion is 0.30 * $51 = $15.30K.
Venture Associates: The remaining 15% of the portfolio was invested in Venture Associates at $4/share. After the price increase to $6/share, the value of this portion is 0.15 * $6 = $0.90K.
Now, let’s sum these values to find the new total portfolio value: New Portfolio Value = $24.20K (GoldFinger) + $15.30K (Moosehead) + $0.90K (Venture Associates) = $40.40K
b. Portfolio Return: To calculate the portfolio’s return, we need to compare the new portfolio value to the initial investment:
Initial Investment = $300,000 New Portfolio Value = $40,400
Portfolio Return = (New Portfolio Value – Initial Investment) / Initial Investment Portfolio Return = ($40,400 – $300,000) / $300,000 = -0.865 or -86.5%
The portfolio has experienced a negative return of 86.5%. This suggests that the investments have not performed well collectively, which may indicate a need for a reassessment of the investment strategy.
c. New Portfolio Weights: The portfolio weights represent the allocation of funds in each stock relative to the total portfolio value. To calculate the new portfolio weights after the price changes, we can use the new values of each stock.
GoldFinger: New Portfolio Weight = (New Value of GoldFinger) / (New Portfolio Value) New Portfolio Weight = $24.20K / $40,400 ≈ 0.598 or 59.8%
Moosehead: New Portfolio Weight = (New Value of Moosehead) / (New Portfolio Value) New Portfolio Weight = $15.30K / $40,400 ≈ 0.379 or 37.9%
Venture Associates: New Portfolio Weight = (New Value of Venture Associates) / (New Portfolio Value) New Portfolio Weight = $0.90K / $40,400 ≈ 0.022 or 2.2%
In this investment scenario, the portfolio has undergone changes in value and allocation due to fluctuations in stock prices. The new portfolio value is $40,400, indicating a significant decline from the initial investment. The portfolio has experienced a negative return of 86.5%, reflecting the performance of the chosen stocks. Additionally, the new portfolio weights show that GoldFinger remains the dominant stock in the portfolio, while Moosehead and Venture Associates have decreased in significance. It is essential for investors to monitor their portfolios regularly and consider adjusting their allocation strategies to meet their financial goals and risk tolerance.
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