Question

Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT) at $50 per share, 200 shares of Lowes Companies, Inc. (LOW) at $30 per share, and 100 shares of Ball Corporation (BLL) at $40 per share. Suppose over the next year Ball Corporation has a return of 12.5%, Lowes Companies has a return of 20%, and Abbott Labs has a return of -10%. The return on your portfolio over the year is:

Answer 1

Answer:

Portfolio return = 0.035 or 3.5%

Explanation:

The portfolio return is a function of the weighted average of individual stocks' returns that form up the portfolio. The formula to calculate the portfolio return is as follows,

Portfolio return = wA * rA  +  wB * rB  +  ...  +  wN * rN

Where,

• w represents the weight of each stock in the portfolio
• r represents the return of each stock

First we need to calculate the investment of each stock,

Abbott = 200 * 50 = $10000

Lowes = 200 * 30 = $6000

Ball = 100 * 40 = $4000

Portfolio return = (10000 / 20000) * -0.10  +  (6000/20000) * 0.20  +  

(4000/20000) * 0.125

Portfolio return = 0.035 or 3.5%