You own three stocks: 600 shares of Apple Computer, 10,000 shares of Cisco Syste
ID: 2744491 • Letter: Y
Question
You own three stocks: 600 shares of Apple Computer, 10,000 shares of Cisco Systems, and 5,000 shares of Colgate-Palmolive. The current share prices and expected returns of Apple, Cisco, and Colgate-Palmolive are, respectively, $ 451, $ 21, $ 98 and 12 %, 10 %, 8 %. a. What are the portfolio weights of the three stocks in your portfolio? b. What is the expected return of your portfolio? c. Suppose the price of Apple stock goes up by $ 24, Cisco rises by $ 5, and Colgate-Palmolive falls by $ 14. What are the new portfolio weights? d. Assuming the stocks' expected returns remain the same, what is the expected return of the portfolio at the new prices?
Explanation / Answer
Apple
Cisco
CP
Total
No of shares(R)
600
10,000
5,000
Return
12%
10%
8%
Price(P)
451
21
98
R x P
270,600
210,000
490,000
970,600
Weight of each share
0.28
0.22
0.50
a)Apple = .28, Cisco= .22, and CP = .50
b) Expected return of portfolio = 0.28*12%+0.22*10%+0.50*8%
= 3.36%+ 2.2%+4%
= 9.56%
c)
Apple
Cisco
CP
Total
No of shares(R)
600
10,000
5,000
Return
12%
10%
8%
Price(P)
475
26
84
R x P
285,000
260,000
420,000
965,000
Weight of each share
0.30
0.27
0.44
Apple = 0.30, Cisco= 0.27, and CP = 0.44
d)Expected return of portfolio = 0.30*12%+0.27*10%+0.44*8%
= 3.36%+ 2.7%+3.52%
= 9.82%
Apple
Cisco
CP
Total
No of shares(R)
600
10,000
5,000
Return
12%
10%
8%
Price(P)
451
21
98
R x P
270,600
210,000
490,000
970,600
Weight of each share
0.28
0.22
0.50
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