Question

Company A and B are both service companies. For the past three years their stock returns were:

A: -5%, 15%, 20%

B: 8%, 8%, 20%

If A and B are combined into a portfolio with 50% of the funds invested in each stock, calculate the expected return on the portfolio.

Answer 1

Return of A = -5%+15%+20%/3 = 30%/3 = 10%

Return of B = 8%+8%+20%/3 = 36%/3 = 12%

Expected return of portfolio = 0.5*10%+0.5*12%

= 5%+6%

= 11%

Expected return of portfolio = 11%