Question

You own a portfolio that has $2,500 invested in stock A and $3,500 invested in stock Z. If the expected returns on these stocks are 15% percent and 14% percent respectively, what is the expected return on the portfolio?

Stock A $ value $2,500

Stock A E(R) 15.00%

Stock Z $ value $3,500

Stock Z E(R) 14.00%

13.25%

15.75%

14.42%

16.92%

Answer 1

Amount invested in stock A = 2500

Amount invested in stock Z = 3500

Total amount invested in the portfolio = $2500 + $3500 = $6000

Weight of stock A in the portfolio = WA = 2500/6000 = 0.416666666666667

Weight of stock Z in the portfolio = WZ = 3500/6000 = 0.583333333333333

Expected return on stock A = E[RA] = 15%

Expected return on stock Z = E[RZ] = 14%

Expected return on the portfolio is calculated using the formula:

Expected portfolio return = E[RP] = WA*E[RA] + WB*E[RZ] = 0.416666666666667*15% + 0.583333333333333*14% = 14.4166666666667% ~ 14.42% (Rounded to two decimals)

Answer -> 14.42%