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Suppose you invest equal amounts in a portfolio with an expected return of 12% and a...

Suppose you invest equal amounts in a portfolio with an expected return of 12% and a standard deviation of returns of 16% and a risk-free asset with an interest rate of 2%. calculate the expected return on the resulting Portfolio.

A. 9%

B. unable to determine without knowing the correlation coefficient

C. 8%

D. 7%

E. 12%

F. 2%

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Answer #1

The return of a portfolio is the weighted average return of the securities which constitute the porfolio. Here you invest equal amounts in both the securities, weight will be 50%.

Stock Weight Expected Return (%) Weight*Expected Return
portfolio 0.50                               12.00 6.00
Risk free asset 0.50 2.00 1.00

Portfolio Return = Weight*Expected Return

= 6+1

= 7%

Since the weights are same, it can also be calculated as average of returns.

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