You own a portfolio that has $1500 invested in Stock A and $2,600 invested in
Stock B. If the expected returns on these stocks are 11.1 percent and 16.7 percent,
respectively, what is the expected return on the portfolio?
To calculate the expected return on the portfolio, we need to use the weighted average of the returns of each stock.
Step 1: Calculate the weighted return for Stock A:
Weighted Return of Stock A = Amount Invested in Stock A * Expected Return of Stock A
= $1500 * 11.1%
Step 2: Calculate the weighted return for Stock B:
Weighted Return of Stock B = Amount Invested in Stock B * Expected Return of Stock B
= $2600 * 16.7%
Step 3: Calculate the total invested amount in the portfolio:
Total Invested Amount = Amount Invested in Stock A + Amount Invested in Stock B
Step 4: Calculate the expected return on the portfolio:
Expected Return on the Portfolio = (Weighted Return of Stock A + Weighted Return of Stock B) / Total Invested Amount
By plugging in the values, we can calculate the expected return on the portfolio:
Weighted Return of Stock A = $1500 * 11.1% = $166.50
Weighted Return of Stock B = $2600 * 16.7% = $433.20
Total Invested Amount = $1500 + $2600 = $4100
Expected Return on the Portfolio = ($166.50 + $433.20) / $4100
= $599.70 / $4100
≈ 0.1460 or 14.60%
Therefore, the expected return on the portfolio is approximately 14.60%.