Question

An investor created an equal weighted portfolio of AMZN, IMB, AAA and DAE on July 1, 2016. These stocks did not pay any dividends during the period in this problem. ? The returns on the stocks in July 2016 were 7.6%, ?2.1%, 6.8%, and 1.8%, respectively. The returns on the stocks in August 2016 were 2.4%, ?4.8%, 3.1%, 5.2%.?

• What was the portfolio return in July 2016? ?

• What would be the portfolio return in August 2016 if the portfolio is not rebalanced??

• What would be the portfolio return in August 2016 if the portfolio is rebalanced to its weights on July 1, 2016?

Answer 1

		Assume Investment as on July1,2016
		AMZN	100
		IMB	100
		AAA	100
		DAE	100
		Weight of each=0.25
		Portfolio return in July 2016 (percentage)	3.525	(0.25*7.6+0.25*(-2.1)+0.25*6.8+0.25*1.8)
		Portfolio return in July 2016	3.53%
		Investment as on August1, 2016
		AMZN	107.6	(100*1.076)
		IMB	97.9	(100*(1-0.021)
		AAA	106.8	(100*1.068)
		DAE	101.8	(100*1.018)
		Total	414.1
	A	Weight of AMZN	0.259841	107.6/414.1
	B	Weight of IMB	0.236416	97.9/414.1
	C	Weight of AAA	0.257909	106.8/414.1
	D	Weight of DAE	0.245834	101.8/414.1
	Rp=A*2.4+B*(-4.8)+C*3.1+D*5.2	Portfolio Return in August without Rebalancing(percentage)	1.566675
		Portfolio Return in August without Rebalancing	1.57%
	Rp=0.25*2.4+0.25*(-4.8)+0.25*(3.1)+0.25*5.2	Portfolio Return if the portfolio is balance to its weights as on July 1,2016(percentage)	1.475
		Portfolio Return if the portfolio is balance to its weights as on July 1,2016	1.48%