Portfolio Rebalancing
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Using the data below, suppose you are holding a market portfolio, and have invested $12000 in stock C.
a) How much have you invested in stock A?
b) How many shares of B do you hold?
c) If the price of Stock C suddenly drops to $4 per share, what trades would you need to make to maintain a market portfolio?
Stock Price/Shares ($) Number of shares outstanding ( millions)
A 10 10
B 20 12
C 8 3
D 50 1
E 45 20.
See the attached file.
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Solution Summary
This solution illustrates how to compute how many of each stock in a market portfolio one must hold and how to rebalance the portfolio to maintain the market weights.
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