Question

You own a portfolio that has 4,800 shares of stock A, which is priced at 15.4 dollars per share and has an expected return of 6.71 percent, and 3,800 shares of stock B, which is priced at 24.6 dollars per share and has an expected return of 16.07 percent. The risk-free return is 3.28 percent and inflation is expected to be 2.4 percent. What is the expected real return for your portfolio? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

Answer 1

Answer:
Stock A:
Number of Shares = 4,800
Value per Share = $15.40
Value of Stock A = 4,800 * $15.40
Value of Stock A = $73,920

Stock B:
Number of Shares = 3,800
Value per Share = $24.60
Value of Stock A = 3,800 * $24.60
Value of Stock A = $93,480

Total Value of Portfolio = $73,920 + $93,480
Total Value of Portfolio = $167,400

Weight of Stock A = $73,920 / $167,400
Weight of Stock A = 0.4416

Weight of Stock A = $73,920 / $167,400
Weight of Stock A = 0.4416

Weight of Stock B = $93,480 / $167,400
Weight of Stock B = 0.5584

Portfolio Return = (0.4416 * 6.71%) + (0.5584 * 16.07%)
Portfolio Return = 11.94%

Real Return = (Portfolio Return – Inflation Rate) / (1 + Inflation Rate)
Real Return = (0.1194 – 0.024) / (1 + 0.024)
Real Return = 0.0954 / 1.024
Real Return = 9.32%