Question

3. Expected return of an equally weighted portfolio is simply the ___________ of the returns of the assets in the portfolio

Select one:

a. Geometric mean

b. Arithmetic mean

c. Sum of squared returns

d. Standard deviation

Answer 1

Answer : b : Arithmetic average

Last 2 answers are not related at all as they itself are separately found out using portfolio returns.

First answer, Geometric mean is not possible because we are not using any compounding formula for solving the portfolio return.

When weights are equal, the portfolio return is same as Arithmetic return

For example, The return on 3 assets = 12%, 15% and 18%

So Arithmetic mean = simple average = (12%+ 15% + 18%)/ 3 = 15%

now as all three assets have equal weight, it will be = 1/3

so Portfolio return = sum (weight x return) = 1/3 x12% + 1/3 x 15% + 1/3 x 18% = 15%

both are coming same.

Hope it clarified, Thank you. Thumbs up please.