Question

You own a portfolio of two stocks, A and B. Stock A is valued at $6,124 and has an expected return of 14.5 percent. Stock B has an expected return of 7.8 percent. What is the expected return (in percent) on the portfolio if the portfolio value is $10,375

Answer 1

Answer:

The expected return (in percent) on the portfolio is 11.8 percent.

Explanation:

The expected return on a portfolio refers to the addition of the products of weight in the portfolio and expected return of all the investment in the portfolio.

For this question, the expected return (in percent) on the portfolio can be calculated as follows:

Portfolio value = $10,375

Value of Stock A = $6,124

Value of stock B = Portfolio value - Value of stock A = $10,375 - $6,124 = $4,251

WA = Weight of stock A in the portfolio = Value of stock A / Portfolio value = $6,124 / $10,375 = 0.59, or 59%

WB = Weight of stock B in the portfolio = Value of stock B / Portfolio value = $4,251 / $10,375 = 0.41, or 41%

EA = Expected return of Stock A = 14.5%

EB = Expected return of Stock B = 7.8%

Therefore, we have:

Expected return on the portfolio = (WA * EA) + (WB * EB) = (59% * 14.5%) + (41% * 7.8%) = 11.8 percent

Therefore, the expected return (in percent) on the portfolio is 11.8 percent.