Question

You own a portfolio that has $3,300 invested in Stock A and $4,400 invested in Stock B. Assume the expected returns on these stocks are 9 percent and 15 percent, respectively. What is the expected return on the portfolio

Answer 1

12.42%

Step-by-step explanation:

Expected return on a portfolio is the sum of the products of weight in the portfolio and expected return of all the investment in the portfolio.

To estimate the expected return on the portfolio, the following calculation are done first:

Total amount invested = Amount invested in Stock A + Amount invested in Stock A = $3,300 + $4,400 = $7,700

Weight of a Stock in a portfolio = Amount invested in the Stock / Total amount invested

Therefore, we have:

WA = Weight of Stock A in the portfolio = $3,300 / $7,700 = 0.43, or 43%

WB = Weight of Stock B in the portfolio = $4,400 / $7,700 = 0.57, or 57%

EA = Expected returns on stock A = 9%

EB = Expected returns on stock A = 15%

Therefore,

Expected return on the portfolio = (WA * EA) + (WB * EB) = (43% * 9%) + (57% * 15%) = 12.42%

Therefore, the expected return on the portfolio is 12.42%.