Question

Problem 6.27 David is going to purchase two stocks to form the initial holdings in his portfolio. Iron stock has an expected return of 21 percent, while Copper stock has an expected return of 15 percent. If David plans to invest 30 percent of his funds in Iron and the remainder in Copper, then what will be the expected return from his portfolio? (Round answer to 1 decimal place, e.g. 17.5%.) Expected return % LINK TO TEXT What would the expected return of David's portfolio be if he invested 70 percent of his funds in Iron stock? (Round answer to 1 decimal place, e.g. 17.5%.) Expected return %

Answer 1

Answer:

a. 16.8%

b. 19.2%

Explanation:

The computation of the expectation return is shown below:

1. If 30% is invested:

= Iron Return × Probability + Copper return × Probability

= 21 × 30% + 15 × 70%

= 6.3% + 10.5%

= 16.8%

The remaining 70% is allocated to the copper

2. If 70% is invested:

= Iron Return × Probability + Copper return × Probability

= 21 × 70% + 15 × 30%

= 14.7% + 4.5%

= 19.2%

The remaining 30% is allocated to the copper