Question

You own a porfolio that has 2000 shares of stock A, whick is priced at $18 per share and has an expected return of 12.50% and 3000shares of stock B, which priced at $8 per share and has an expected return of 5%. the risk-free return is 4.27% and inflation is expected to be 3.56%. what is expected real return for you portfolio?

Answer 1

Investment in A = 2000 shares * 18 = 36000

Investment in B = 3000 shares * 8 = 24000

Total Invesment = 36000 + 24000 = 60,000

Expected Retrun = Expected Return of A * Weight of A + Expected Return of B * Weight of B

= 12.50% * 36000 / 60000 + 5% * 24000 / 60000

= 9.5%

Real Rate of Return = ((1+Nominal Rate of Return) / (1+Inflation Rate)) -1

= ((1+0.095) / (1+0.0356)) - 1

= 1.0573580533 - 1

= 0.0573580533 OR 5.74%

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