Question

An investor invests $4,000 to buy 200 shares of Sand Corporation, which has an expected return of 24%; $2,000 to buy 100 shares of Water Corporation, with an expected return of 18%; and $4,000 to buy 400 shares in Beach Corporation, with an expected return of 28%. What is the expected return on this portfolio?

Answer 1

Answer :

Expected return on the given portfolio = Sum of ( Proportional $ Weights of individual investment * Their expected returns )

i.e., [ Wt. of Sand Corporation shares * ER ( SC ) ] * [  Wt. of Water Corporation shares * ER ( WC ) ] * [  Wt. of Beach Corporation shares * ER ( BC ) ]

Total $ investment = 4,000 + 2,000 + 4,000 = 10000

Wt. of Sand Corporation shares in the total portfolio = 4,000 / 10,000 = 4 / 10

Wt. of Water Corporation shares in the total portfolio = 2,000 / 10,000 = 2 / 10

Wt. of Beach Corporation shares in the total portfolio = 4,000 / 10,000 = 4 / 10

Therefore,

The Expected return on the given portfolio is

= ( 4 / 10 * 24% ) + ( 2 / 10 * 18% ) + ( 4 / 10 * 28% )

= 24.4%