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

Question

Haorld Rawlings has computed the returns he earned last year from each of the stocks he holds in his 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:

a. Compute the return that Harold earned on his portfolio during the year.

b. Harold has decided to keep Danka in his portfolio, even though it has experienced financial difficulties and performed very poorly last year, because he excepts 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 change 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.)

Stock Return Amount Invested AT&T 22.5% $5,200 GM 12.3 5,520 Danka - 44.7 1,200 Suiza Foods 100.0 3,080

Explanation / Answer

a.  return that Harold earned on his portfolio during the year = (22.5%*5200+ 12.3%*5520+ (-44.7%)*1200+ 100%*3080)/(5200+5520+1200+3080)= 29.28%

b.

return on the portfolio for next year. = (22.5%*6370+ 12.3%*6198.96+ (25%)*663.6+ 100%*6160)/(6370+6198.96+663.6+6160) = 43.94%

Stock Return Amount Invested Amount at the end of 1 year= Amount invested*(1+Return) New Return AT&T 22.50% $5,200 6370 22.50% GM 12.30% 5,520 6198.96 12.30% Danka -44.70% 1,200 663.6 25.00% Suiza Foods 100% 3,080 6160 100.00%

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