You own a portfolio that has $2,000 invested in Stock A and $3,000 invested in S

Question

You own a portfolio that has $2,000 invested in Stock A and $3,000 invested in Stock B. If the expected returns on these stocks are 9 percent and 12 percent, respectively, what is the expected return on the portfolio? (Round your answer to 2 decimal places. (e.g., 32.16))

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Explanation / Answer

The expected return of a portfolio is the sum of the weight of each asset times the expected return of

each asset. The total value of the portfolio is:

Total value = $2,000 + 3,000 = $5,000

So, the expected return of this portfolio is:

E(Rp) = ($2,000/$5,000)(0.09) + ($3,000/$5,000)(0.12)

= 0.036 + 0.072

= .108 or 10.8%

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