Final answer:
The statement is true as the expected return of a portfolio considers the weighted average return of each security based on the amount invested in each. Calculating this involves determining the expected return for each investment and their respective weights in the portfolio. Risk levels inform the expected returns, with higher risk often correlating with higher potential returns.
Step-by-step explanation:
The expected return of a portfolio does indeed take into account the amount of money currently invested in each individual security. This statement is true because the expected return is an average of what each investment within the portfolio can potentially yield, weighted by the proportion of each investment in the overall portfolio value. Therefore, it is important to consider both the individual performance and the relative size of each investment within the portfolio to determine its expected return.
To calculate the expected return on a portfolio, one would generally follow these steps:
- Find the expected return for each individual investment within the portfolio.
- Weight each expected return by the proportion of the total investment that is allocated to that individual security.
- Sum these weighted returns to determine the overall expected return for the portfolio.
Investments with higher risks are naturally expected to o ffer higher returns to compensate for the higher likelihood of fluctuating outcomes. Contrastingly, investments that are considered safer offer lower returns and generally exhibit less volatility in their returns.