Question

What is the expected return on an equally weighted portfolio of these three stocks? (Hint: Equally means that each stock has the same weight. Given that there are only 3 stocks, each has a weight of 1/3) Enter the answer with 4 decimals (e.g. 0.1234).

Answer 1

Answer:

9.52%

Explanation:

Calculation to determine the expected return on an equally weighted portfolio of these three stocks

Return of portfolio Boom = - 0.11 + 0.23 + 0.26 /3

Return of portfolio Boom= 0.38/3

Return of portfolio Boom=12.67%

ALTERNATIVE :

Weights= 1/3

Weight = 0.33333

(0.33333× -0.11)+ (0.33333 × 0.23)+( 0.33333 × 0.26)

= - 0.03667 + 0.07667 + 0.08667

= 12.67%

Return of portfolio Bust = 0.16 + 0.03 + (-0.08)

Return of portfolio Bust=0.11/3

Return of portfolio Bust = 3.67%

Alternative =( 0.33333 × 0.16) + (0.3333× 0.03) + (0.33333 × -0.08(

Alternative= 0.05333 + 0.00999 + (0.02667)

Alternative= 3.67%

Expected return of portfolio = (0.65 × 0.1267) + (0.35 × 0.0367)

Expected return of portfolio=0.082355 + 0.012845

Expected return of portfolio=0.0952*100

Expected return of portfolio = 9.52%

Therefore the expected return on an equally weighted portfolio of these three stocks will be 9.52%