Question

You own a portfolio that has $2,848 invested in Stock A and $3,385 invested in Stock B. If the expected returns on these stocks are 11 percent and 17 percent, respectively, what is the expected return (in percent) on the portfolio?

Answer 1

The expected return on the portfolio is calculated using the weighted average of the expected returns of each stock. After calculating the proportions and applying the expected returns, the portfolio has an expected return of approximately 14.26%.

Step-by-step explanation:

The expected return on the portfolio can be calculated using the weighted average of the expected returns based on the proportion of the total investment in each stock. The formula for the expected return on the portfolio is:

Expected return = (Proportion of Stock A × Expected return of Stock A) + (Proportion of Stock B × Expected return of Stock B)

First, calculate the total value of the portfolio:

Total Portfolio Value = $2,848 + $3,385 = $6,233

Then, calculate the proportion invested in each stock:

Proportion of Stock A = $2,848 / $6,233

Proportion of Stock B = $3,385 / $6,233

Now, apply the expected returns:

Expected return on Portfolio = (Proportion of Stock A × 11%) + (Proportion of Stock B × 17%)

Perform the calculations:

Expected return on Portfolio = ($2,848 / $6,233 × 11%) + ($3,385 / $6,233 × 17%)

Expected return on Portfolio = (0.4568 × 11%) + (0.5432 × 17%)

Expected return on Portfolio = 5.0248% + 9.2344%

Expected return on Portfolio = 14.2592%

Therefore, the expected return on the portfolio is approximately 14.26%.