Question

An investment advisor has recommended a $50,000 portfolio containing assets A, B, and C: $25,000 will be invested in A with an expected return of 12%; $10,000 will be invested in B with an expected return of 18%; and $15,000 will be invested in C with an expected annual return of 8%. The expected annual return of this portfolio is

Answer 1

Answer:

The expected annual return of this portfolio is 12%

Explanation:

For calculating the expected annual return of the portfolio first we have to compute the weightage of every assets which is equals to

= Assets value ÷  total value of assets

where,

total value of assets = A + B + C

                                  = $25,000 + $10,000 + $15,000

                                  = $50,000

So

For A = $25,000 ÷ $50,000 = 0.5

For B = $10,000 ÷ $50,000 = 0.2

For  C = $15,000 ÷ $50,000 = 0.3

Now the formula should be applied to compute the expected annual return for all assets which is show below

= A assets weightage × expected return + B assets weightage × expected return + C assets weightage × expected return

=  0.5 × 12% + 0.2 × 18% + 0.3 × 8%

= 6 + 3.6 + 2.4

= 12%

Hence, The expected annual return of this portfolio is 12%