Question

You own three stocks: 600 shares of Apple Computer, 10,000 shares of Cisco Systems, and 5,000 shares of Colgate-Palmolive. The current share prices and expected returns of Apple, Cisco, and Colgate-Palmolive are, respectively, $536, $25, $105 and 12%, 10%, 8%. 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 $30, Cisco rises by $5, and Colgate-Palmolive falls by $10. 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? a. What are the portfolio weights of the three stocks in your portfolio? The portfolio weight of Apple Computer is -----%. (Round to two decimal places.)

Answer 1

Weights can be found in several different ways, such as price weighted, value weighted or equal weighted. Following claculation has been done using the value weighted methodology where the value of each stock is found by multiplying the number of shares to the price and then weights are found by dividing the value of a stock to the total value of the portfolio. Expected return of the portfolio is the sum of the value weight multiplied by expected returns of the individual stocks.

When prices are changed, the expected return of the portfolio falls from 9.63% to 9.61%