Stock A has an expected return of 20%,and stock B has an expected return of 4%.However,the risk of stock A as measured by its variance is 3 times that of stock B. If the two stocks are combined equally in a portfolio, what would be the portfolio's expected return?
A) 20.0%.
B) 4.0%.

C) 12.0%.
D) Greater than 20%.

Question

Stock A has an expected return of 20%,and stock B has an expected return of 4%.However,the risk of stock A as measured by its variance is 3 times that of stock B. If the two stocks are combined equally in a portfolio, what would be the portfolio's expected return?
A) 20.0%.
B) 4.0%.

C) 12.0%.
D) Greater than 20%.

Quizplus · Accepted Answer

We can use the formula for calculating the expected return of a portfolio to solve this problem:
Expected return of portfolio = (weight of stock A * expected return of stock A) + (weight of stock B * expected return of stock B)
Given that the two stocks are combined equally in a portfolio, the weights would be 0.5 each.
Expected return of portfolio = (0.5 * 20%) + (0.5 * 4%)
Expected return of portfolio = 10% + 2%
Expected return of portfolio = 12%

Stock a Has an Expected Return of 20%,and Stock B