A portfolio is invested 26 percent in Stock G, 41 percent in Stock J, and 33 per

Question

A portfolio is invested 26 percent in Stock G, 41 percent in Stock J, and 33 percent in Stock K. The expected returns on these stocks are 9 percent, 11.5 percent, and 16.9 percent, respectively.

What is the portfolio’s expected return? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

What is the portfolio’s expected return? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Explanation / Answer

Portfolios' expected return key points: To calculate the expected return of a portfolio, WE need to know the expected return and weight of each asset in a portfolio. The figure is found by multiplying each asset's weight with its expected return, and then adding up all those figures at the end. These estimates are based on the assumption that what we have seen in the past is what we can expect in the future, and ignores a structural view on the market. Stock Investment Expected Return G 26% 9% J 41% 11.50% K 33% 16.90% The expected value is just the sum of the weights times the expected returns for each stock, SO, E(P) = WEIGHTS(G)*EXPECTED RETURNS(G)+WEIGHTS(J)*EXPECTED RETURNS(J)+WEIGHTS(K)*EXPECTED RETURNS(K) Expected return= (.26)*(9.0)+(.41)*(11.5)+(.33)*(16.9) E(p)= 12.632

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