Question

Assume that on January 1, 2017, you have a portfolio composed of 2 shares, in which 60% of the portfolio is invested in stocks of company A, and 40% on stocks of company B. The stocks of company A have an historical annual growth rate of 15%, whereas the stocks of company B have an historical annual growth rate of 5%. What will be the cumulative return (total return) of your portfolio after 3 years? Round your answer to the nearest tenth of a percent (e.g., 33.3%).

Answer 1

Sol:

Stock A weight in portfolio (wA) = 60%

Stock B weight in portfolio (wB) = 40%

Historical growth rate of stock A (rA) = 15%

Historical growth rate of stock B (rB) = 5%

Annual portfolio return (R) = (wA x rA) + (wB x rB)

Annual portfolio return (R) = (60% x 15%) + (40% x 5%)

Annual portfolio return (R) = 0.09 + 0.02 = 0.11 or 11%

Cumulative return (total return) (Tr) of the portfolio after 3 years = (1 + R)^n - 1

Tr = (1+11%)^3 -1

Tr = (1.11)^3 -1

Tr = 0.3676 or 36.8%

Therefore Cumulative return (total return) (Tr) of the portfolio after 3 years is 36.8%