Consider the following information on portfolio weights, predicted returns and standard deviation of returns for two restaurant stocks, Super Foods Inc., and Henry's Dining Corp. Assume the correlation between two stocks is 0.4. Given the information, what is the portfolio's expected return? Provide your finals answer in decimal points (e.g. 0.13) and not in percent terms (e.g. 13%).
Stock |
Weights |
Return |
Standard Deviation |
Super Foods Inc. |
0.63 |
0.14 |
0.03 |
Henry's Dining Corp. |
(1-0.63) |
0.10 |
0.03 |
What is the portfolio's expected return?
Answer: 0.1252
Working
Formula for calculation expected return of the portfolio is as follows
Expected return of portfolio = Total of (weight * return)
Expected return of portfolio = (Super Foods Inc. stock’ weight * Return) + (Henry's Dining Corp. stock’ weight * Return)
= (.63 * 0.14) + (.37 * 0.10)
= 0.0882 + 0.037
= 0.1252
Note:
Henry's Dining Corp. stock’ weight = .37 (i.e. 1 - .63)
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