Question

Your portfolio has three asset classes. U.S goverment T-Bills account for 45% of the portfolio, large-company stocks constitute another 40%, and small company stocks make up the remaining 15%. If the expected returns are 2% for the T-Bills, 10% for the large-company stocks, and 15% for the small-company stocks, what is the expected return of the portfolio

Answer 1

To calculate the expected return of the portfolio, we need to multiply the percentage allocation of each asset class by its respective expected return and sum them up.

The expected return of the T-Bills is 45% * 2% = 0.9%

The expected return of the large-company stocks is 40% * 10% = 4%

The expected return of the small-company stocks is 15% * 15% = 2.25%

Now we add up these expected returns:

0.9% + 4% + 2.25% = 7.15%

Therefore, the expected return of the portfolio is 7.15%.