Question

You currently hold a portfolio consisting of $10000 invested in Walmart with an expected return of 11%, $5000 invested in IBM with an expected return of 10% and $5000 invested in ABC with an expected return of 12%. What is the expected return on your portfolio?

10%

11%

12%

$2200

$20000

Answer 1

Given about a portfolio

Investment in Walmart = $10000

investment in IBM = $5000

Investment in ABC = $5000

So, total investment = investment in Walmart + IBM + ABC = 10000 + 5000 + 5000 = $20000

So, weight of Walmart in portfolio = Investment in Walmart/Total investment Ww = 10000/20000 = 0.5

So, weight of IBM in portfolio = Investment in IBM/Total investment Wi = 5000/20000 = 0.25

So, weight of ABC in portfolio = Investment in ABC/Total investment Wa = 5000/20000 = 0.25

Expected return on Walmart Rw = 11%

Expected return on IBM Ri = 10%

Expected return on ABC Ra = 12%

So, expected return on portfolio is weighted average return on its assets

=> E(p) = Ww*Rw + Wi*Ri + Wa*Ra = 0.5*11 + 0.25*10 + 0.25*12 = 11%

So, Expected return on portfolio is 11%

Option B is correct.