Question

The following information regarding a portfolio of two stocks are given: w1 = .25, w2 = .75, E(R1) = .08, and E(R2) = .15.

Which of the following regarding the portfolio expected return, E(Rp), is correct?
-.3640
-.2300
-.1325
-.1699

Answer 1

0.1325

Explanation:

Weight of the first stock (w1) = .25

Weight of the second stock (w2) = .75

Expected return for the first stock (E(R1)) = .08

Expected return for the second stock (E(R2)) = .15

The expected return of the portfolio is given by the weighted average of the expected return of each stock:

`E(R_p)=w_1*E(R_1)+w_2*E(R_2)\\E(R_p)=0.25*.08 +0.75*.15\\E(R_p)=0.1325`

The portfolio expected return, E(Rp), is 0.1325