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If a portfolio has a positive weight for each asset, can the expected return on the...

If a portfolio has a positive weight for each asset, can the expected return on the portfolio be greater than the return on the asset in the portfolio that has the highest return? Can theexpected return on the portfolio be less that the return on the asset in the portfolio with the lowest return? Explain

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Expert Solution

If a portfolio has a positive weight for each asset -

  • The expected return on the portfolio cannot be greater than the return on the asset in the portfolio which has the highest return, because the return on such portfolio would be a "Weighted Average Return", where the average of returns of all assets is considered based on their respective weights in the portfolio, hence the assets in the portfolio with lower returns (than the highest return asset) will bring the weighted average down (lower than that of the highest return asset).
  • Similarly, the expected return on the portfolio cannot be less than the return on the asset in the portfolio which has the lowest return, since the assets in the portfolio with higher returns will bring the weighted average up (higher than that of the lowest return asset).
  • The weighted average return on the portfolio would be a rate between "the return of asset which has the highest return" and "the return of asset which has the lowest return".

jeff jeffy answered 2 years ago
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