Question

There are two ways to calculate the expected return of a​ portfolio: Either calculate the expected return using the value and dividend stream of the portfolio as a​ whole, or calculate the weighted average of the expected returns of the individual stocks that make up the portfolio. Which return is​ higher? ​(Select the best choice​ below.) A. The weighted average expected return of the individual stocks is higher because returns are concave. B. Impossible to​ tell, it depends on the portfolio. C. Neitherboth calculations give the same answer. D. The weighted average expected return of the individual stocks is higher because returns are convex.

Answer 1

Correct Answer:

C. Neither, both calculations give the same answer.

Step-by-step explanation:

In any given business calculation that is expected to arrive at a particular solution, the solution obtained would always be the same irrespective of the method adopted. For the example, the case of expected return of a portfolio in a business, the calculation would definitely give the same answer when two methods are adopted.