What is the expected return on a portfolio consisting of an equal amount invested in each stock?
Stock Expected Return
A 15%
B 10
C 22
D 14
b.What is the expected return on the portfolio if 50 percent of the funds are invested in stock C, 30 percent in stock A, and 20 percent in stock D?
To calculate the expected return on a portfolio, we need to multiply the weight of each investment by its expected return, and then sum the results.
For the first question, where each stock has an equal amount invested, we have:
Stock A's weight = 1/4 = 0.25
Stock B's weight = 1/4 = 0.25
Stock C's weight = 1/4 = 0.25
Stock D's weight = 1/4 = 0.25
Now we multiply the weight of each stock by its expected return:
Stock A's contribution = 0.25 * 15% = 3.75%
Stock B's contribution = 0.25 * 10% = 2.5%
Stock C's contribution = 0.25 * 22% = 5.5%
Stock D's contribution = 0.25 * 14% = 3.5%
Lastly, we sum up the contributions to find the expected return on the portfolio:
Expected return on the portfolio = 3.75% + 2.5% + 5.5% + 3.5% = 15.25%
For the second question, where 50% of the funds are invested in stock C, 30% in stock A, and 20% in stock D, we adjust the weights accordingly:
Stock A's weight = 0.30
Stock C's weight = 0.50
Stock D's weight = 0.20
Again, we multiply the weight of each stock by its expected return:
Stock A's contribution = 0.30 * 15% = 4.5%
Stock C's contribution = 0.50 * 22% = 11%
Stock D's contribution = 0.20 * 14% = 2.8%
Lastly, we sum up the contributions to find the expected return on the portfolio:
Expected return on the portfolio = 4.5% + 11% + 2.8% = 18.3%