Question

You have a portfolio worth $111.000 that has an expected return of 12 percent. The portfolio has $18,800 invested in Stock O, $26,600 invested in Stock P, with the remainder in Stock Q. The expected return on Stock O is 16.5 percent and the expected return on Stock P is 13 percent. What is the expected return on Stock Q?

Answer #1

In the given question,

portfolio worth $111000 with expected return of 12%

Thus Expected return on portfolio should be 111000*12% = $13320

However Portfolio consist of

- Stock O worth $18800 with an expected return of 16.5%
- Stock P worth $26600 with an expected return of 13%
- Stock Q (Remainder) i.e 111000-18800-26600 = $65600.

Thus let Expected reurn on Stock Q be x in %

Hence Expected return on portfolio should be equals to expected return on all stock in portfolio.

This Implies, Expected return on portfolio = Stock O * Expected return on Stock O + Stock P * Expected return on Stock P + Stock Q * Expected return on Stock Q

Thus, 13320 = 18800*16.5% + 26600*13% + 65600*x%

Thus , 13320 = 3102 + 3458 + 65600 * x%

Thus, x = 10.30%

Conclusion, Expected return on stock Q should be 10.30%

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