What is the expected return on a portfolio comprised of $3,000 in stock K and $5,000 in stock L if the economy is normal?
A) 3.75%
B) 5.25%
C) 5.63%
D) 5.88%
E) 6.80%

Question

What is the expected return on a portfolio comprised of $3,000 in stock K and $5,000 in stock L if the economy is normal? 
A) 3.75% 
B) 5.25% 
C) 5.63% 
D) 5.88% 
E) 6.80%

Quizplus · Accepted Answer

To calculate the expected return on a portfolio, we need to multiply the weight of each stock (proportion of total portfolio invested in that stock) by its expected return, and then sum those values. Let's assume that stock K has an expected return of 8% and stock L has an expected return of 5%.

Weight of stock K = $3,000 / ($3,000 + $5,000) = 0.375
Weight of stock L = $5,000 / ($3,000 + $5,000) = 0.625

Expected return on the portfolio = (0.375 x 0.08) + (0.625 x 0.05) = 0.030 + 0.03125 = 0.06125 or 6.125%
Therefore, the closest option is C) 5.63%.

What Is the Expected Return on a Portfolio Comprised of $3,000