Question

Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT) at $50 per share, 200 shares of Lowes (LOW) at $30 per share, and 100 shares of Ball Corporation (BLL) at $40 per share. Suppose over the next year Ball has a return of 25%, Lowes has a return of 30%, and Abbott Labs has a return of -20%. The return on your portfolio over the year is:

Answer 1

Investment of $20,000

Return on portfolio:

Investments in:

Abbott Labs (ABT) = $50 x 200 = $10,000

Lowes (LOW) = $30 x 200 = $6,000

Ball Corporation (BLL) = $40 x 100 = $4,000

Returns:

Ball = 25% x $4,000 = $1,000

Lowest = 30% x $6,000 = $1,800

Abbott = -20% x $10,000 = -$2,000

Portfolio Returns = $800 $(1,000 + 1,800 - 2,000)

Step-by-step explanation:

Return on portfolio is the net return earned by the investor in her different investments. This is obtained by calculating the individual returns on investment and netting the results off.

The investments in Ball and Lowes yielded positive returns of 25% and 30% respectively. The investment in Abbott Labs yielded a negative return of 20%. This destroyed the gains made in the other two companies to the tune of $2,000.

The advantage of having a portfolio of investments instead of one single investment is that the offsetting in returns offered by the group. Had you invested only in Abbott Labs, for example, you would have lost $4,000 returns without any compensatory gains.