Question

You own three​ stocks:

1 comma 000

shares of Apple​ Computer,

10 comma 000

shares of Cisco​ Systems, and

5 comma 000

shares of Goldman Sachs. The current share prices and expected returns of​ Apple, Cisco, and Goldman Sachs​ are, respectively,

$ 136

​,

$ 22

​,

$ 122

and

12 %

​,

10 %

​,

10.5 %

.

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

$ 5

​,

Cisco rises by

$ 3

​,

and Goldman Sachs falls by

$ 9

.

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?

Answer 1

a]

Weight of each stock = value of stock / total value

value of each stock = price per share * number of shares

b]

Expected return of portfolio = sum of (weight * expected return) of each stock.

Expected return of portfolio = 10.60%.

c]

new portfolio weights are calculated with the changed stock prices.

d]

Expected return of portfolio = 10.59%