What is the expected return on a portfolio comprised of $4,000 in stock M and $6,000 in stock N if the economy is in a normal period?
A)6.4%
B)7.6%
C)10.4%
D)13.2%
E)14.0%

Question

What is the expected return on a portfolio comprised of $4,000 in stock M and $6,000 in stock N if the economy is in a normal period? 
A)6.4% 
B)7.6% 
C)10.4% 
D)13.2% 
E)14.0%

Quizplus · Accepted Answer

To calculate the expected return, we need to use the weighted average of the returns of each stock, where the weights are the proportion of the total portfolio invested in each stock. 
Let R(M) be the return on stock M and R(N) be the return on stock N. 
Then, the expected return is:
(0.4 x R(M)) + (0.6 x R(N)) 
where 0.4 is the proportion of the portfolio invested in stock M and 0.6 is the proportion invested in stock N. 
Since the economy is in a normal period, we can assume the expected returns for each stock are the same as their historical average returns. 
From the table, we see that the historical average returns for stock M and stock N are 12% and 6%, respectively. 
Substituting these values into the formula, we get: 
(0.4 x 12%) + (0.6 x 6%) = 7.6% 
Therefore, the expected return on the portfolio is 7.6%, which is closest to option B.

What Is the Expected Return on a Portfolio Comprised of $4,000