Question

A portfolio consists of $16,600 in Stock M and $26,900 invested in Stock N. The expected return on these stocks is 9.60 percent and 13.20 percent, respectively. What is the expected return on the portfolio

Answer 1

Answer:

11.82%

Explanation:

Given that,

Value in stock M = $16,600

Value in stock N = $26,900

Expected return on Stock M = 9.60%

Expected return on Stock N = 13.20%

Total value :

= Value in stock M + Value in stock N

= $16,600 + $26,900

= $43,500

Expected Portfolio return on stock M:

= Return × Investment weight

$=\frac{Value\ in\ stock\ M}{Total\ value}\times 0.096$

$=\frac{16,600}{43,500}\times 0.096$

= 3.66%

Expected Portfolio return on stock N:

= Return × Investment weight

$=\frac{Value\ in\ stock\ N}{Total\ value}\times 0.132$

$=\frac{26,900}{43,500}\times 0.132$

= 8.16%

Expected return on the portfolio:

=  Expected Portfolio return on stock M + Expected Portfolio return on stock N

= 3.66% + 8.16%

= 11.82%