Question

1. You have observed the following returns on Stock A's stocks over the last five years:

3.24%, 31.37%, 21.94%, 22.49%, 31.59%

What is the average return on the stock over this five-year period?

2. A portfolio has three stocks: Stock A, Stock B, and Stock C. Stock A has a return of -6.35%. Stock B has a return of 10.28%. The weight of Stock A in the portfolio is 30%. The weight of stock B in the portfolio is 35%. The weight of Stock C in the portfolio is 35%. If the portfolio return is 35.24%, what is the return of Stock C in the portfolio?

Answer 1

1. The average return on Stock A over the past five years is computed as follows:

= ( 3.24% + 31.37% + 21.94% + 22.49% + 31.59% ) / 5

= 22.126%

2. The return on stock C is calculated as follows:

Portfolio return = Return on Stock A x Weight of Stock A + Return on Stock B x Weight of Stock B + Return on Stock C x Weight of Stock C

0.3524 = -0.0635 x 0.30 + 0.1028 x 0.35 + Return on Stock C x 0.35

Return on Stock C = 0.9585 or 95.85% Approximately

We can also cross verify the return on stock c by putting it in the above equation and after this, it should give a return equal to the portfolio return as shown below:

Portfolio return = -0.0635 x 0.30 + 0.1028 x 0.35 + 0.9585 x 0.35

= 0.3524

It means that the return that we had calculated is correct

Feel free to ask in case of any query relating to this question