Question

Stocks:

50% of portfolio - Advanced Micro Devices, Inc. (AMD)

starting price: 30.9$ Closing price: 29.94$

50% of portfolio - Canopy Growth Corp (CGC)

Starting price: 24.21$ Closing price: 27.31$

Report the overall realized return on your investment portfolio.

Don’t confuse expected and realized returns.

This is expected return:

E[Rp]=w1*R1+w2*R2+w3*R3+w4*R4

wi=weight of stock ‘’i’’ in your portfolio

This is realized one:

Ri=realized return of asset ‘’i’’= (Price @ end – Price @ beginning)/Price @ beginning

OR

more formally:

R=(P[t+1]-P[t])/P[t]

Example:

The cost of your portfolio at t=0 is 100 euro. At t=1, your portfolio costs 107 euro.

Realized return for the period= (107-100)/100=7%

starting price: 24.21$     Closing price: 27.31$

Answer 1

Proportion of stock Advanced Micro Devices (AMD): 50% or 0.5

Starting price of AMD: $ 30.9. Closing price of AMD: $ 29.94

Proportion of Canopy Growth Corporation (CGC): 50% or 0.5

Starting price of CGC: $ 24.21. Closing price of CGC: $27.31

Realized Return is calculated using the given formula, R= (P[t+1]-P[t])/P[t]

Where R= Realized Return, P[t+1]= Closing Price and P[t]= Starting Price price.

In the case of stock of AMD, P[t+1]=$29.94 and P[t]=$30.9

Hence Realized Return on the stock of AMD= (29.94-30.9)/30.9 = -0.96/30.9 = -0.031068 or, -3.1068%

In the case of stock of CGC. P[t+1]=$27.31 and P[t]=$24.21

Hence Realized Return on the stock of CGC= (27.31-24.21)/24.21 = 3.1/24.21 = 0.128046 or, 12.8046%

Realized Return on the portfolio containing two stocks is R[P]= w1*r1+w2*r2 where R[P]= Return on portfolio, w1 is the weight of stock 1 in the portfolio, r1= Return on stock 1, w2= weight stock 2 and r2= Return on stock 2.

In the given case, Weight of both the stocks AMD and CGC are 0.5 each. Return on AMD (r1) is computed above at -3.1068% and  the Return on CGC (r2), at 12.8046%.

Hence the Realized Return on the portfolio= 0.5*(-3.1068) + 0.5*12.8046 = -1.5534 + 6.4023= 4.8489%

Hence the answer is 4.8489%