Question

Daniel is going to purchase two stocks to form the initial holdings in his portfolio. Iron stock has an expected return of 16 percent, while Copper stock has an expected return of 22 percent.

If Daniel plans to invest 30 percent of his funds in Iron and the remainder in Copper, what will be the expected return from his portfolio? (Round answer to 1 decimal place, e.g. 17.5%.)

Expected return

%

What would the expected return of David's portfolio invests 70 percent of his funds in Iron stock? (Round answer to 1 decimal place, e.g. 17.5%.)

Expected return

%

Answer 1

a)

Stock	Expected return	*	Weight	=	weighted average return of portfolio
Iron stock	16%		30%		16*30%= 4.8
copper stock	22%		70%   [100%-30%]		22*70%= 15.4
Expected return of portfolio	20.2%

*The total weight of portfolio is 100% so if out of 100% ,30% is invested in Iron so remaining 100-30 = 70% is invested in copper.

b)

Stock	Expected return	*	Weight	=	weighted average return of portfolio
Iron stock	16%		70%		16*70%= 11.2
copper stock	22%		30%   [100%-30%]		22*30%= 6.6
Expected return of portfolio	17.8%