Question

What is the expected return of the three-stock portfolio described below?

common stock market value expected return
ando inc. 95,000 12.0%
bee co. 32,000 8.75%
cool inc. 65,000 17.7%
a. 15.27%
b. 13.38%
c. 12.82%
d. 18.45%

Answer 1

The correct answer is option b. 13.38%.

Step-by-step explanation:

To calculate the expected return of a portfolio, you add up the products of the market values and expected returns of the individual stocks, divided by the total market value of the portfolio. Here is the step-by-step calculation for the three-stock portfolio:

• Multiply the market value of each stock by its expected return.
• Add up these products to get the total expected return in dollars.
• Divide the total expected return in dollars by the total market value of the portfolio.

Ando Inc. = 95,000 * 12.0% = 11,400

Bee Co. = 32,000 * 8.75% = 2,800

Cool Inc. = 65,000 * 17.7% = 11,505

Total expected return in dollars = 11,400 + 2,800 + 11,505 = 25,705

Total market value = 95,000 + 32,000 + 65,000 = 192,000

Expected return of the portfolio = (25,705 / 192,000) * 100 = 13.38%