Question

In: Finance

Given the year end prices of the following stocks, estimate the expected return of a portfolio...

Given the year end prices of the following stocks, estimate the expected return of a portfolio of 30% AAA and 70% BBB. Enter your answer as a percent without the % sign. Round your final answer to two decimals.

Year AAA BBB
2006 100 55
2007 105 65
2008 120 60
2009 110 70
2010 130 65
2011 160 80

Solutions

Expert Solution

First we will Calculate Return of AAA and BBB by following formula      
rate of return = (closing price -opening price)/Opening price      
First year 2007 Return = (105-100)/105 = 5%      
year   AAA   BBB
      
      
2007   5.0000%   18.1818%
2008   14.2857%   -7.6923%
2009   -8.3333%   16.6667%
2010   18.1818%   -7.1429%
2011   23.0769%   23.0769%
      
Total    52.2111%   43.0902%
ER=   10.4422%   8.6180%


Expected return = total /number of years      
Weight of AAA= 30%   W

of BBB =70%  


Expected return of portfolio = (Expected return of A * Weight A) + ( Expected Return of B * weight B)      
(10.4422%*30%)+(8.6180%*70%)      
      
9.17%      
      
So Expected Return of Portfolio is 9.17      
      


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