Question

You own a portfolio that has $2,300 invested in Stock A and $3,850 invested in Stock B. If the expected returns on these stocks are 9 percent and 17 percent, respectively, what is the expected return on the portfolio?(Do not round your intermediate calculation

Answer 1

Answer: The expected return on the portfolio is 13.86 %

Explanation:

To calculate the expected return on the portfolio we must multiply the stocks' expected return with its weight and then take the sum.

E($r_{p}$) = [ $w_{A}$ × E($r_{A}$) ] + [ $w_{B}$ × E($r_{B}$) ]

Where,

E($r_{p}$) = Expected return on the the portfolio that consists of Stock A and Stock B

$w_{A}$ = Weight of Stock A = $2,300 / ( $2,300 + $3,850) = 46/123

$w_{B}$ = Weight of Stock B = $3,850 / ( $2,300 + $3,850) = 77/123

E($r_{A}$) = Expected return on Stock A = 9%

E($r_{B}$) = Expected return on Stock B = 7%

E($r_{p}$) = [ $w_{A}$ × E($r_{A}$) ] + [ $w_{B}$ × E($r_{B}$) ]

       = ( $\frac{46}{123}$ x 9 ) + ( $\frac{77}{123}$ x 17)

       = 13.86 %