Question

Suppose that you hold a two-asset portfolio consisting of 100 shares of clooney brothers at $33 per share and 100 shares of marx brothers at $42 per share. assume that you have computed the expected return on clooney brothers and marx brothers to be 20% and 12%, respectively. what is the expected return from the portfolio?
a. 15.5%
b. 20.0%
c. 12.0%
d. 16.0%
e. none of the above

Answer 1

Straightforward Solution

The long way around is to compute the return from each investment and relate the sum of those returns to the toal investment.

You have invested $33×100 = $3300 in clooney. You expect a return of 20%×$3300 = $660 on that investment.

You have invested $42×100 = $4200 in marx. You expect a return of 12%×$4200 = $504 on that investment.

Your total expected return is $660 + 504 = $1164. Your total investment is $3300 + 4200 = $7500. Thus, the return on your investment is expected to be

... $1164/$7500 = 0.1552 ≈ 15.5% . . . . matches choice a.

Alternative Solution

Since the same number of shares is involved in both investments, you can weight the expected return percentages by the ratio of share price to total of share prices:

expected return = (33/75)×20% + (42/75)×12%

... = 8.80% + 6.72% = 15.52%