Question

Andy holds a portfolio with the following securities:

Security: Stock A

Investment: 708,504

Return: 13.2%

Security: Stock B

Investment: 249,634

Return: 9.0%

Security: Stock C

Investment: 279,122

Return: 8.1%

Calculate the expected return of portfolio.

HINT: Round the answers to ONE decimal places in percentage form.

A) 10.2%

B) 11.2%

C) 10.1%

D) 12.2%

Answer #1

Weight of stock A investment in the portfolio = Stock A investment/(Stock A investment + Stock B investment + Stock C investment)

= 708504/(708504+249634+279122)

= 0.57264

Weight of Stock B investment = Stock B investment/(Stock A investment + Stock B investment + Stock C investment)

= 249634/(708504+249634+279122)

= 0.201764

Weight of Stock C investment = Stock C investment/(Stock A investment + Stock B investment + Stock C investment)

= 279122/(708504+249634+279122)

= 0.225597

Expected return of Portfolio = Return of stock A*Weight of stock A + Return of stock B*Weight of stock B + Return of stock C*Weight of stock C

= 13.2*0.57264 + 9*0.201764 +8.1*0.225597

= 7.559 + 1.816 + 1.827

= 11.2

Expected return of portfolio is 11.2% and therefore the correct option is B.

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