Question

Assume there is a fixed exchange rate between the Canadian and U.S. dollar. The expected return and standard deviation of return on the U.S. stock market are 18% and 15%, respectively. The expected return and standard deviation on the Canadian stock market are 13% and 20%, respectively. The covariance of returns between the U.S. and Canadian stock markets is 1.5%. If you invested 50% of your money in the Canadian stock market and 50% in the U.S. stock market, the expected return on your portfolio would be

Answer 1

Answer:

The expected return on the portfolio is 15.5%.

Explanation:

The expected return on portfolio formula requires multiplying every asset's weight in the portfolio by their respective expected return, then summing up all values together.

$\text{Expected Return}=W_{A}\cdot R_{A}+W_{B}\cdot R_{B}$

Here,

W = weight of the respective asset

R = expected return of the respective asset

It is provided that:

The expected return on the U.S. stock market is 18%.

The expected return on the Canadian  stock market is 13%.

The proportion of money invested in both stock markets is 50%.

Compute the expected return on the portfolio as follows:

$\text{Expected Return}=W_{U}\cdot R_{U}+W_{C}\cdot R_{C}$

                           $=(0.50\times 0.18)+(0.50\times 0.13)\\=0.09+0.065\\=0.155$

Thus, the expected return on the portfolio is 15.5%.