Ed Moura has $29000 invested in stocks paying 7%. How much additional money should be invest in certificates of deposit paying 3% so that the average return on the two investments is 4%?

Answer 1

Right now, Ed's return is 7%. The more and more money he invests in certificates of deposit at a 3% return, the closer his average return will be to 4%. The goal of this problem is to set up an equation that will let us solve exactly how much he needs to invest in certificates of deposit to reach a 4% return.

Let's call the investment in the certificates of deposit 'C' and the total of his stock investment and certificates of deposit investment 'T'. Therefore we have:

29,000 + C = T

We can also set up a weighted average equation by multiplying the dollar amount of each investment by its return:

29,000(0.07) + C(0.03) = T(0.04)

We can't solve the above equation yet because there are two variables. However, using the top equation, we see we can substitute 29,000+C for T and then solve:

29,000(0.07) + C(0.03) = (29,000+C)(0.04)

2,030 + 0.03C = 1,160 + 0.04C

870 = 0.01C

C = $87,000

Therefore, Ed should invest $87,000 in certificates of deposit.