Question

You have invested $12,000 in ABC stock, 8,000 in DEF stock, and 6000 in GHI stock. If u expect the returns of 5%, 3%, and 8% on the stock then what is the expected return from your portfolio?

Answer 1

Expected Rate of Return of portfolio

= R1 x W1 + R2 x W2 … Rn x Wn

Where:

• R = Rate of return
• W = Asset weight

Weights = Investment in individual stock/ Total investment

Total investment = $(12,000 + 8,000 + 6,000)

   =$26,000

Weights =

ABC stock = 12,000/26,000 = 0.46

DEF stock = 8,000/26,000 = 0.31

GHI stock = 6,000/26,000 = 0.23

So, Expected return of portfolio =

= 5% × 0.46 + 3% × 0.31 + 8% × 0.23

= 2.3% + 0.93% + 1.84%

= 5.07%

The expected return of portfolio is 5.07%

NOTE =

The total weight should be equal to 1 .

The value of weights have been rounded to 2 decimals. And total weight value is equal to 1(0.46 + 0.31 + 0.23).