Question

You own a portfolio of two stocks, A and B. Stock A is valued at $84,650 and has an expected return of 10.6 percent. Stock B has an expected return of 6.4 percent. What is the expected return on the portfolio if the portfolio value is $97,500?
A) 10.09 percent
B) 10.05 percent
C) 9.99 percent
D) 9.62 percent
E) 9.74 percent

Answer 1

Answer:

Portfolio return = 0.1004646154 or 10.04646154% rounded off to 10.05%

Option B is the correct answer

Explanation:

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

Portfolio return = wA * rA  +  wB * rB

Where,

• w is the weight of each stock
• r is the rate of return on each stock

As the investment in total portfolio is 97500 and the investment in stock A is 84650, the investment in stock B will be,

Stock B = 97500 - 84650 = 12850

Portfolio Return = 84650 / 97500 * 0.106  +  12850 / 97500 * 0.064

Portfolio return = 0.1004646154 or 10.04646154% rounded off to 10.05%