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You own a portfolio that has $3,850 invested in Stock A and $6,100 invested in Stock...

You own a portfolio that has $3,850 invested in Stock A and $6,100 invested in Stock B. If the expected returns on these stocks are 7.2 percent and 13.1 percent, respectively, what is the expected return on the portfolio?

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Answer #1

The return of a portfolio is the weighted average return of the securities which constitute the porfolio.

Stock Investment($) Weight Expected Return(%) Weight*Expected Return
A                     3,850 0.3869* 7.20 2.79
B                     6,100 0.6131** 13.1 8.03
               

Expected Return on Portfolio = 10.82% (2.79+8.03)

*Weight of stock A = 3850 / (3850+6100) = 3850/9950 = .3869

***Weight of stock B = 6100 / (3850+6100) = 6100/9950 = .6131 or 1-Weight of stock A

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