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finlep [7]
3 years ago
9

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
Mathematics
1 answer:
Rina8888 [55]3 years ago
6 0
<h3>Straightforward Solution</h3>

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.

<h3>Alternative Solution</h3>

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%

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