Question

A portfolio has 100 shares of shares of Stock A that sell for $20 per share and 120 shares of stock B that sell for $30 per share. If the expected returns on Stock A and B are 5% and 10%, respectively, what is the expected return on the portfolio?        

Multiple Choice

• 1.8%                          

• 8.2%

• 6.8%                

• 35.7%

Answer 1

Answer: 8.2%

Total value of stock A =(Number of shares)*(Share price)=100*20=2000
Similarly, total value of stock B=120*30=3600
Total portfolio value=2000+3600=5600

Percentage of stock A in the portfolio =2000/5600=0.357142857
Percentage of stock A in the portfolio =3600/5600=0.642857143
Expected returns on Stock A and B are 5% and 10%
Expected return on the portfolio=0.357142857*5% + 0.642857143*10%
=0.017857143 + 0.064285714
=0.082142857 or 8.21% (Rounded to 1 decimal place)