Question

You own three​ stocks: 600 shares of Apple​ Computer, 10,000 shares of Cisco​ Systems, and 5,000 shares of​ Colgate-Palmolive. The current share prices and expected returns of​ Apple, Cisco, and​ Colgate-Palmolive are,​ respectively, $ 515​, $ 20​, $ 106 and 12 %​, 10 %​, 8 %. (a) What are the portfolio weights of the three stocks in your​ portfolio? (b) What is the expected return of your​ portfolio? (c) Suppose the price of Apple stock goes up by $ 22​, Cisco rises by $ 6​, and​ Colgate-Palmolive falls by $ 10. What are the new portfolio​ weights? (d) Assuming the​ stocks' expected returns remain the​ same, what is the expected return of the portfolio at the new​ prices?

Answer 1

Answer:

• (a) What are the portfolio weights of the three stocks in your​ portfolio?

Stock   Weights  

Apple  30%

Cisco  19%

Colgate  51%

TOTAL  100%

• (b) What is the expected return of your​ portfolio?

Stock   Expected Ret. Portfolio  

Apple      3,6%

Cisco       1,9%

Colgate   4,1%

Portfolio 9,6%

• (c) What are the new portfolio​ weights?

Stock   Weights  

Apple  30%

Cisco  24%

Colgate  45%

TOTAL  100%

• (d) what is the expected return of the portfolio at the new​ prices?

Stock   Expected Ret. Portfolio  

Apple  3,6%

Cisco  2,4%

Colgate  3,6%

TOTAL  9,7%

Explanation:

• (a) What are the portfolio weights of the three stocks in your​ portfolio?

To calculate the portfolio weights it's necessary to know the total value by Stock of the portfolio, with the information available about share prices and sharea outstanding is possible to find the total value of the portfolio and the weights of each share.

Stock   Value   Weights  

Apple   $309,000  30%

Cisco   $200,000  19%

Colgate   $530,000  51%

TOTAL   $1,039,000  100%

• (b) What is the expected return of your​ portfolio?

The Expected Return of the portfolio it's related to the weights of each stock, with the information about the Expected Return and the Weights of each stock it's possible to know the Expected Return of the Portfolio.

Stock   Exp Return   Value   Weights       Exp. Ret. Portfolio  

Apple      12%    309.000  30%  3,6%

Cisco       10%    200.000  19%   1,9%

Colgate    8%     530.000  51%   4,1%

TOTAL              1.039.000  100% 9,6%

When the value of each share changes, this impacts the total value of the portfolio and current weights, then changes the Expected Return of the portfolio.