Question

The Amada fund contains the three stocks listed below. The fund is comprised of 40% Canyon, 40% Zara, and 20% Junio.

a) Calculate the yearly returns of the portfolio, as well as its arithmetic and geometric average.

b) Assume you invested at the beginning of 2016, and sold at the end 2019 (so there was a four year holding period). Ignore all taxes. If you put $20,000 in this portfolio at the beginning of 2016, what was the value at the end of 2019? Show the steps of your work.

	Canyon	Zara	Junio
2016	20%	10%	15%
2017	-10%	8%	-8%
2018	-4%	2%	-2%
2019	15%	12%	10%

Answer 1

The expected return of the portfolio is calculated using the following equation

Rp  = wa ra + wb wb + wc rc + -----------+ wn rn

where w indicates the weights of each stock

r represents the return for each stock

Portfolio return in 2016 = 0.40 0.20 + 0.40 0.10 + 0.20 0.15

Portfolio return in 2016 = 15%

Portfolio return in 2017 = 0.40 -0.10  + 0.40 0.08 + 0.20 -0.08 = - 2.40%

Portfolio return in 2018 = 0.40 -0.04 + 0.40 0.02 + 0.20 -0.02 = - 1.20%

Portfolio return in 2019 =   0.40 0.15 + 0.40 0.12 + 0.20 0.10 = 12.80%

Arithmetic average = 6.05%

Geometric average = 5.76%

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b)

The value at the end of 2019 is calculated using the following equation

The arithmetic average is used as the interest rate.

The value of the portfolio at the end of 2019 = $ 25297.2