The expected return on a portfolio is
A) the sum of the square root of the expected returns on the individual stocks included in the portfolio times the beta of the individual stocks.
B) the simple arithmetic average of the expected returns on the individual stocks included in the portfolio.
C) the geometric average of the expected returns on the individual stocks included in the portfolio.
D) the weighted average of the expected returns on the individual stocks included in the portfolio.

Question

Quizplus · Accepted Answer

The expected return on a portfolio is the weighted average of the expected returns on the individual stocks included in the portfolio. This is because each stock's expected return contributes differently to the overall performance of the portfolio, based on its weight in the portfolio. Therefore, option D is the correct choice. Option A is incorrect because there is no relationship between the square root of expected returns and beta. Option B is incorrect because a simple average does not take into account the weighting of individual stocks in the portfolio. Option C is also incorrect for the same reason as option B, as a geometric average does not consider the weighting of individual stocks.

The Expected Return on a Portfolio Is