Question

Assume that you put 43% of your wealth in GE stock and the rest of your wealth in the risk-free treasury bill. You believe GE has an expected return of 13.0% and the risk-free rate has an expected return of 1.8%. You also know that GE has a variance of 17.3%. What is the expected Share?

Answer 1

The expected return on a portfolio with 43% invested in GE stock and the rest in risk-free treasury bills, considering GE's expected return of 13.0% and the risk-free rate of 1.8%, is calculated to be 6.616%.

Step-by-step explanation:

The student's question pertains to the calculation of the expected return of a mixed investment portfolio comprising a certain percentage in GE stock and the remainder in risk-free treasury bills. Using the given figures: GE stock expected return is 13.0%, the risk-free treasury bill return is 1.8%, and 43% of wealth is invested in GE stock. To calculate the expected share or return, we use a weighted average formula:

Expected return on the portfolio = (Weight of GE stock × Return on GE stock) + (Weight of Treasury Bill × Return on Treasury Bill)

Expected return on the portfolio = (0.43 × 0.13) + (0.57 × 0.018)

Expected return on the portfolio = 0.0559 + 0.01026

Expected return on the portfolio = 0.06616 or 6.616%

The expected return on the portfolio is therefore 6.616%.