Answer: 12.72%
Explanation:
Given the following information ;
50 Shares of AAA at $20 and expected returns of 12%
25 Shares of BBB at $60 and expected returns of 10%
75 Shares of CCC at $50 and expected returns of 14%
Total value of the portfolio ;
Total Portfolio Value = ( 50×20 ) + ( 25×60 ) + ( 75×50 )
= 1000 + 1500 + 3750 = $6,250
Weight of each share in the portfolio;
Weight of Stock AAA = ( 50×20 ) / 6250 = 0.16
Weight of Stock BBB = ( 25×60 ) / 6250 = 0.24
Weight of Stock CCC = ( 75×50 ) / 6250 = 0.60
Expected return on portfolio is calculated thus;
Expected Portfolio Return = ( Weight of AAA×Expected Returns ) + ( Weight of BBB×Expected Returns ) + ( Weight of CCC×Expected Returns )
Expected Portfolio Return = ( 0.16×0.12 ) + ( 0.24×0.10 ) + ( 0.60×0.14 )
Expected portfolio return = (0.0192+0.024+0.084) = 0.1272
0.1272 = 12.72%
