Question

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

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.