Question

You have a portfolio worth $96,000 that has an expected return of 12 percent. The portfolio has $18,200 invested in Stock O, $26,000 invested in Stock P, with the remainder in Stock Q. The expected return on Stock O is 15.9 percent and the expected return on Stock P is 13 percent. What is the expected return on Stock Q?

Multiple Choice

• 11.60%

• 11.19%

• 10.46%

• 10.13%

• 13.37%

Answer 1

Answer : Correct Option is 10.13%

Explanation :

Portfolio Return =[ (Expected Return of O * Weight of O) + (Expected Return of P * Weight of P) + (Expected Return of Q * Weight of Q)]

Given :

Portfolio Return = 12%

Expected Return of O = 15.9%

Expected Return of P = 13%

Weight of O = 18200 / 96000

= 0.18958333 or 0.19

Weight of P = 26000 / 96000

= 0.27083333 or 0.27

Weight of Q = (96000 - 18200 - 26000) / 96000

= 51800 / 96000

= 0.5395833333 or 0.54

Portfolio Return =[ (Expected Return of O * Weight of O) + (Expected Return of P * Weight of P) + (Expected Return of Q * Weight of Q)]

12% =[ (15.9% * 0.19 ) + (13% * 0.27) + (Expected Return of Q * 0.54)]

12% = 3.021% + 3.51% + (0.54 * Expected Return of Q )

==> Expected Return of Q = (12% - 3.021% - 3.51%) / 0.54

= 10.127% or 10.13%