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%
Given about a portfolio
100 shares of stock A @ $20 per share
=> Investment in A = shares*price = 100*20 = $2000
120 shares of stock B @ $30 per share
=> Investment in B = shares*price = 120*30 = $3600
So, weight of A Wa = investment in A/(investment in A + investment in B) = 2000/(2000+3600) = 0.3571
Weight of B Wb = 1-Wa = 1-0.3571 = 0.6429
Return on A, Ra = 5%
Return on B, Rb = 10%
Expected return on portfolio is weighted average return on its assets,
=> Expected return on portfolio = Wa*Ra + Wb*Rb = 0.3571*5 + 0.6429*10 = 8.2%
Option B is correct.
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