Question

A portfolio consists of $15,600 in Stock M and $24,400 invested in Stock N. The expected return on these stocks is 9.10 percent and 12.70 percent, respectively. What is the expected return on the portfolio?

Multiple Choice

• 10.90%

• 11.30%

• 10.50%

• 12.00%

• 9.63%

Answer 1

Given about a portfolio,

Investment in stock M = $15600

Investment in stock N = $24400

So, weight of M Wm = Investment in M/(investment in M + investment in N) = 15600/(15600+24400) = 0.39

Weight of N Wn = 1-Wm = 1-0.39 = 0.61

Expected return on stock M, Rm = 9.10%

Expected return on stock N, Rn = 12.70%

So, Expected return on portfolio is weighted average of its assets

=> Expected return on portfolio = Wm*Rm + Wn*Rn = 0.39*9.1 + 0.61*12.7 = 11.30%

Option B is correct.