Question

What is the expected return on a portfolio that has $100 invested in stock 1 with an expected return of 18.0% and $45 invested in stock 2 with an expected return of 12.0%? a) 16.1% b) 16.3% c) 16.5% d) 16.7%

Answer 1

Portfolio r = 0.161379 or 16.1379% rounded off to 16.1%

Option a is the correct answer

Step-by-step explanation:

The expected return of a portfolio is the function of the weighted average of the individual stocks' returns that form up the portfolio. To calculate the expected rate of return of a two stock portfolio, we use the following formula,

Portfolio r = wA * rA + wB * rB

Where,

• w is the weight of each stock
• r is the return on each stock

Total investment in portfolio = 100 + 45 = 145

Portfolio r = 100/145 * 0.18 + 45/145 * 0.12

Portfolio r = 0.161379 or 16.1379% rounded off to 16.1%