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Texas Lotto Stock Investment

A winner of the Texas Lotto has decided to invest $50,000 per year in the stock market. Under consideration are stocks for a petrochemical firm and a public utility. Although a long-range goal is to get the highest possible return, some consideration is given to the risk involved with the stocks. A risk index on a scale of 1 to 10 (with 10 being the most risky) is assigned to each of the 2 stocks. The total risk of the portfolio is found by multiplying the risk of each stock by the dollars invested in each stock.

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Let x = the proportion of the investment in Petrochemical. Then 1 - x is the proportion of the investment in Utility. To maximize the return the investor should ...

Solution Summary

This solution analyzes the risk and return involved with investing in two different stocks.