Question

Suppose a portfolio consists of three stocks, the first of which is 47.7% of the portfolio, and the rest of the portfolio is evenly split between the other two. If their expected returns are 6.01%, 10.81%, and 6.7% respectively, what is the portfolio's expected return?

Answer 1

To calculate the portfolio's expected return, we need to find the weighted average of the expected returns of each stock in the portfolio. The first stock has a weight of 47.7% and the remaining 52.3% is evenly split between the second and third stocks. The portfolio's expected return is approximately 7.45633%.

Step-by-step explanation:

Portfolio expected return

To find the portfolio's expected return, we need to calculate the weighted average of the expected returns of each stock in the portfolio. Let's denote the weights of the first stock, second stock, and third stock as w1, w2, and w3 respectively. We know that the first stock is 47.7% of the portfolio, so its weight is 0.477. The remaining 52.3% is split evenly between the second and third stocks, so each of them has a weight of 0.2615.

Now, we can calculate the portfolio's expected return using the following formula: Expected Return = (w1 * Return1) + (w2 * Return2) + (w3 * Return3), where Return1, Return2, and Return3 are the expected returns of each stock. Plugging in the given values:

Expected Return = (0.477 * 6.01%) + (0.2615 * 10.81%) + (0.2615 * 6.7%)

Simplifying the expression:

Expected Return ≈ 2.87477% + 2.827315% + 1.754205% ≈ 7.45633%