Question

John is going to purchase two stocks to form the initial holdings in his portfolio. Iron stock has an expected return of 17 percent, while Copper stock has an expected return of 23 percent.

If John plans to invest 30 percent of his funds in Iron and the remainder in Copper, what will be the expected return from his portfolio? (Round answer to 1 decimal place, e.g. 17.5%.)

Expected return

Type your answer here %

  

  

What would the expected return of David's portfolio invests 70 percent of his funds in Iron stock? (Round answer to 1 decimal place, e.g. 17.5%.)

Expected return

Type your answer here %

Answer 1

If John plans to invest 30 percent of his funds in Iron and the remainder in Copper, what will be the expected return from his portfolio?

Answer: 21.2%

What would the expected return of David's portfolio invests 70 percent of his funds in Iron stock?

Answer: 18.8%

Working

Formula for calculating expected return of portfolio is as follows;

Expected return = R1 * W1 +R2 * W2

Where,

R1 = Expected return of stock Iron

W1 = Weight of investment in Iron stock

R2 = Expected return of stock Copper

W2 = Weight of investment in Copper stock

If John plans to invest 30 percent of his funds in Iron and the remainder in Copper, what will be the expected return from his portfolio?

Expected return = R1 * W1 +R2 * W2

R1 = Expected return of stock Iron = 17%

W1 = Weight of investment in Iron stock = 30%

R2 = Expected return of stock Copper = 23%

W2 = Weight of investment in Copper stock = 70%

Expected return = R1 * W1 +R2 * W2

                                      = 17%*30% + 23%*70%

                                      = 5.1%+16.1%

                                      = 21.2%

What would the expected return of David's portfolio invests 70 percent of his funds in Iron stock?

Expected return = R1 * W1 +R2 * W2

R1 = Expected return of stock Iron = 17%

W1 = Weight of investment in Iron stock = 70%

R2 = Expected return of stock Copper = 23%

W2 = Weight of investment in Copper stock = 30%

Expected return = R1 * W1 +R2 * W2

                                      = 17%*70% + 23%*30%

                                      = 11.9%+6.9%

                                      = 18.8%