You expect to invest your funds equally in four stocks witht the following expec

Question

You expect to invest your funds equally in four stocks witht the following expected returns:

Stock                               Expected Return

A                                              16%

B                                              14%

C                                              10%

D                                               8%

At the end of the year, each stock had the following realized returns:

Stock                                    Realized Return

A                                                -6%

B                                                -18%

C                                                 3%

D                                                 -22%

Compare the portfolio'sexpected and realized returns

Explanation / Answer

since funds are invested equally in all stocks therefore
expected return of the portfolio = .25*16 + .25*14 + .25*10 + .25*8 = 12 %

realised return of the portfolio = .25*(-6) + .25*18 + .25*3 + .25*(-22) = -1.75 %

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