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 12.5%, Lowes has a return of 21%, and Abbott Labs has a return of -10%. The return on your portfolio over the year is ________.
a. 0%
b. 5.7%
c. 3.8%
d. 7.6%

Answer 1

Answer:

ER(P) = RABT(WABT)  + RLOW(WLOW) + RBBL(WBBL)

ER(P) = -10(0.50) + 21(0.30) + 12.5(0.20)

ER(P) = -5 + 6.3 + 2.5

ER(P) = 3.8%

Value of ABT = 200 shares @ $50 = $10,000

Value of LOW = 200 shares @30 = $6,000

Value of BBL = 100 shares @ $40 = $4,000

Total value of investments                $20,000

Weight of ABT = $10,000/$20,000 x 100 = 50%

Weight of LOW  = $6,000/$20,000 x  100 = 30%

Weight of BBL = $4,000/$20,000 x 100 = 20%

Explanation:

In this case, we need to calculate the expected return of the portfolio, which is the aggregate of return of each stock multiplied by the weight of each stock.  The weight of each stock is the value of each stock divided by the total investment. The variables are defined as follows:

ER(P) = Expected return of portfolio, WABT = Weight of ABT, WLOW = weight of LOW, WBBL = weight of BBL, RABT= Return of ABT, RLOW = Return of LOW and RBBL = return of BBL.