Question

EX2. Selena invests the following sums of money in common stocks of money in common stocks having expected returns as follow:

Common stock $ Amount invested Expected return

A 6,000 0.14

B 11,000 0.16

C 9,000 0.17

D 7,000 0.13

E 5,000 0.20

F 13,000 0.15

G 9,000 0.18

What is the expected return on her portfolio?

Answer 1

Common Stock Column i	Amount invested in $ Column ii	Weight Column iii	Expected Return on stock Column iv	Expected return on portfolio Column V=Column iii*Column iv
A	6,000.00	0.1000	0.14	0.0140
B	11,000.00	0.1833	0.16	0.0293
C	9,000.00	0.1500	0.17	0.0255
D	7,000.00	0.1167	0.13	0.0152
E	5,000.00	0.0833	0.20	0.0167
F	13,000.00	0.2167	0.15	0.0325
G	9,000.00	0.1500	0.18	0.0270
	60,000.00	1.00		0.1602

Common stock name, amount invested in $ and Expected return for each common stock are taken from question.

Total amount invested = 6,000+11,000+9,000+7,000+5,000+13,000+9,000 = 60,000

Expected return on portfolio is 16.02%.

Formulae used:

1. For weight calculation Column iv

For stock A = Amount invested in stock A/Total amount invested*100 = 6,000/60,000*100=0.10 or 10.00%

For stock B = Amount invested in stock A/Total amount invested*100 = 11,000/60,000*100=0.1833 or 18.33%

For stock C = Amount invested in stock A/Total amount invested*100 = 9,000/60,000*100=0.15 or 15.00%

For stock D = Amount invested in stock A/Total amount invested*100 = 7,000/60,000*100=0.1167 or 11.67%

For stock E = Amount invested in stock A/Total amount invested*100 = 5,000/60,000*100=0.0833 or 8.33%

For stock F = Amount invested in stock A/Total amount invested*100 = 13,000/60,000*100=0.2167 or 21.67%

For stock G = Amount invested in stock A/Total amount invested*100 = 9,000/60,000*100=0.15 or 15.00%

Expected return on portfolio = Total of Column v = 0.1602 or 16.02%