An investor created an equal weighted portfolio of AMZN, IMB, AAA and DAE on Jul

Question

An investor created an equal weighted portfolio of AMZN, IMB, AAA and DAE on July 1, 2016. These stocks did not pay any dividends during the period in this problem. ? The returns on the stocks in July 2016 were 7.6%, ?2.1%, 6.8%, and 1.8%, respectively. The returns on the stocks in August 2016 were 2.4%, ?4.8%, 3.1%, 5.2%.?

• What was the portfolio return in July 2016? ?

• What would be the portfolio return in August 2016 if the portfolio is not rebalanced??

• What would be the portfolio return in August 2016 if the portfolio is rebalanced to its weights on July 1, 2016?

Explanation / Answer

Assume Investment as on July1,2016 AMZN 100 IMB 100 AAA 100 DAE 100 Weight of each=0.25 Portfolio return in July 2016 (percentage) 3.525 (0.25*7.6+0.25*(-2.1)+0.25*6.8+0.25*1.8) Portfolio return in July 2016 3.53% Investment as on August1, 2016 AMZN 107.6 (100*1.076) IMB 97.9 (100*(1-0.021) AAA 106.8 (100*1.068) DAE 101.8 (100*1.018) Total 414.1 A Weight of AMZN 0.259841 107.6/414.1 B Weight of IMB 0.236416 97.9/414.1 C Weight of AAA 0.257909 106.8/414.1 D Weight of DAE 0.245834 101.8/414.1 Rp=A*2.4+B*(-4.8)+C*3.1+D*5.2 Portfolio Return in August without Rebalancing(percentage) 1.566675 Portfolio Return in August without Rebalancing 1.57% Rp=0.25*2.4+0.25*(-4.8)+0.25*(3.1)+0.25*5.2 Portfolio Return if the portfolio is balance to its weights as on July 1,2016(percentage) 1.475 Portfolio Return if the portfolio is balance to its weights as on July 1,2016 1.48%

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