Question

Please show all steps! NO EXCEL! Thank you!!

1. Your portfolio is comprised of 40 percent of stock X, 20 percent of stock Y, and the rest in stock Z. Stock X has an expected return of 10%, stock Y has an expected return of 15%, and stock Z has an expected return of 2%. What is the expected return of your portfolio?

2. Your portfolio is comprised of 20% of stock X, 40% of stock Y, and the rest in stock Z. Stock X has an expected return of 12% and stock Y has an expected return of 20%. If the portfolio has an expected return of 18%, what is the expected return of stock Z?

Answer 1

1. Expected return of portfolio = (Weight of stock X * Expected return of stock X) + (Weight of stock Y * Expected return of stock Y) + (Weight of stock Z * Expected return of stock Z)

Expected return of portfolio = (0.40 * 0.10) + (0.20 * 0.15) + (0.40 * 0.02)

Expected return of portfolio = 0.078 or 7.8%

2. Expected return of portfolio = (Weight of stock X * Expected return of stock X) + (Weight of stock Y * Expected return of stock Y) + (Weight of stock Z * Expected return of stock Z)

0.18 = (0.20 * 0.12) + (0.40 * 0.20) + (0.40 * Expected return of stock Z)

0.18 = 0.024 + 0.08 + (0.40 * Expected return of stock Z)

0.40 * Expected return of stock Z = 0.18 - (0.024 + 0.08)

0.40 * Expected return of stock Z = 0.076

Expected return of stock Z = 0.076 / 0.40

Expected return of stock Z = 0.19 or 19%