Harold Rawlings has computed the returns he earned last year from each of the st

Question

Harold Rawlings has computed the returns he earned last year from each of the stocks he holds in hit portfolio. The individual returns and the amounts he had invested in each stock at the beginning of the year are shown in the following table: Compute the return that Harold earned on his portfolio during the year. Harold has decided to keep Danka in his portfolio, even though it has experienced financial difficulties and performed very poorly last year, because he expects a significant turnaround that will generate a 25 percent return next year. Suppose that Harold is correct Assuming that the returns from the other stocks remain the same as last year, compute the return on the portfolio for next year. (Hint: The portfolio weights for the stocks charge based on the returns earned last year, so the values of the stocks at the end of the year should be used to compute the new weights.)

Explanation / Answer

Stock Investment at beginning      Returns     Investment at the end

AT&T 85200 *0.225 = 19170 104370

GM 5520 *0.123 = 679 6199

Danka 1200 * - 0.447= - 536.4 663.6

Sulza Foods 3080 * 1.00 = 3080 6160

TOTAL 95000 111392.6

Return of portfolio in the year

= 22.5*(85200/95000)+12.3*(5520/95000)+(-44.3)*(1200/95000)

+ 100*(3080/95000)

= 23.576 = say 23.58 % (ANSWER)

Return of portfolio in next year

= 22.5*(104370/111392.6)+12.3*(6199/111392.6)

+ 25*(663.6/111392.6)+100*(6160/11392.6)

= 27.44 % (ANSWER)

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