Question

what is the expected return on a portfolio of 60% stocks and 40% bonds if the expected return on stocks is 8% and on bonds 4%?

Answer 1

To find the expected return on a portfolio of 60% stocks and 40% bonds with expected returns of 8% for stocks and 4% for bonds, calculate the weighted average. The expected return on the portfolio would be 6.4%.

Step-by-step explanation:

To calculate the expected return on a portfolio consisting of 60% stocks and 40% bonds, you can use the weighted average of the returns from both asset classes. The formula for the expected return of a two-asset portfolio is given by:

Expected Return = (Weight of Asset 1 × Expected Return of Asset 1) + (Weight of Asset 2 × Expected Return of Asset 2)

In this case, the expected return on stocks is 8% and the expected return on bonds is 4%. Thus, the calculation would be:

Expected Return = (0.60 × 8%) + (0.40 × 4%)

Expected Return = (0.60 × 0.08) + (0.40 × 0.04)

Expected Return = 0.048 + 0.016

Expected Return = 0.064 or 6.4%

This means that if the expected rates of return for stocks and bonds do not change, the portfolio is expected to have an average annual return of 6.4%.