Student __________________________ Student # ___________________
This is a weighted average concept problem.
The smart investor knows that he should not put all his “eggs in one basket”. In this Prof. Dallis has placed a sum of money (you need to determine how much) into three different “baskets” each earning a different interest rate.
We did a problem like this in class and for homework. This is very similar, the big difference is the investor has chosen a much riskier portfolio and is trying to earn more on her money (notice 70% is now in riskier stocks versus only 30% in very safe bonds and CD’s)
Note: Think of Interest and Dividends as a similar concept. Just add them together to determine his total return on the investments.
A
B
C
D
Type of Investment
Amount of Investment
Return on that Investment – this is the Rate of interest and dividends that the investment earns
Total Amount Earned from all three components.
Bank CD’s
10%
5% Interest
Bonds
20%
8% Interest
Stocks
70%
20% Dividends and trading gains
Total of all investments
100 %
Find the weighted average return on all 3 investments.
Total $ earned on the investments was $10,000.
Draw the investment Picture – use the data in Column A to draw a PIE CHART. Ok to do on paper or in Excel. If doing by hand, try and be close with the numbers.
Compute the Weighted average of the investment. The weighted average is an area concept the product of the Size of the investment x the Rate that it earns. This will give you the average rate of interest earned on all three investments.
Now with the average interest rate compute the total invested if the amount earned for the year was $10,000 in interest and dividends.
Using answer 3 and the %’s by category in the table what amount was invested in each basket? This total should equal the amount found in step 3.