Question

If I invested 50% of my wealth in share Alpha and 50% of my wealth in share Bravo, what would be the expected return of the portfolio? Would you expect the variance of your combined investment in Company Alpha and Company Bravo to be the simple average of the variance of the two investments? Explain your answer.

Year	Returns Alpha	Returns Bravo
1	-5%	20%
2	7.5%	-10%
3	3%	15%
4	-3%	-5%
5	12.5%	30%

Answer 1

Solution :- Average return of Alpha share = Total of return of all years / Number of years.

= [ - 5 % + 7.50 % + 3 % + (-) 3 % + 12.50 % ] / 5

= 15 / 5

= 3 %

Average return of Bravo share = Total of return of all years / Number of years.

= [ 20 % + (-) 10 % + 15 % + (-) 5 % + 30 % ] / 5

= 50 / 5

= 10 %

Expected portfolio return = Weight of investment in Alpha share * Return of Alpha share + Weight of investment in Bravo share * Return of Bravo share.

= 0.50 * 3 % + 0.50 * 10 %

= 1.50 % + 5.00 %

=  6.50 %

Conclusion :- Expected portfolio return = 6.50 %