Question

Returns on stocks X and Y are listed below: Period 1 2 3 4 5 6...

Returns on stocks X and Y are listed below:

Period 1 2 3 4 5 6 7
Stock X 4% 7% -2% 40% 0% 10% -1%
Stock Y 2% -5% 7% 4% 6% 11% -4%

Consider a portfolio of 10% stock X and 90% stock Y.

What is the mean of portfolio returns?

Please specify your answer in decimal terms and round your answer to the nearest thousandth (e.g., enter 12.3 percent as 0.123).

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Answer #1

Return = Return of X * Weight of X + Return of Y * Weight of Y

Period 1 = 4% * 0.10 + 2% * 0.90 = 2.2%

Period 2 = 7% * 0.10 + (-5%) * 0.90 = -3.8

Period 3 = (-2)% * 0.10 + 7% * 0.90 = 6.1%

Period 4 = 40% * 0.10 + 4% * 0.90 = 7.6%

Period 5 = 0% * 0.10 + 6% * 0.90 = 5.4%

Period 6 = 10% * 0.10 + 11% * 0.90 = 10.9%

Period 7 = (-1%) * 0.10 + (-4%) * 0.90 = -3.7%

Mean = Sum of terms / No of terms

= 2.2% + (-3.8%) + 6.1% + 7.6% + 5.4% + 10.9% + (-3.7) / 7

= 24.70 / 7

= 3.53%

Mean Return of the portfolio = 3.53%

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