Stock A has an expected return of 17.8 percent,and Stock B has an expected return of 9.6 percent.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)13.37 percent
B)13.70 percent
C)15.75 percent
D)12.41 percent
E)14.55 percent

Question

Quizplus · Accepted Answer

To find the portfolio's expected return, we need to take a weighted average of the expected returns of each stock, where the weights are equal since the two stocks are combined equally in the portfolio.

Let x be the expected return of the portfolio. Then, we can write:

x = 0.5(17.8%) + 0.5(9.6%)

Simplifying this expression gives:

x = 13.7%

Therefore, the portfolio's expected return is 13.7%.

Note that we were not given any information about the correlation between the two stocks, so we could not use the formula for portfolio variance to calculate the portfolio's risk. However, we can see that the portfolio's risk will be less than the risk of Stock A (since Stock B has a lower risk), but greater than the risk of Stock B (since Stock A has a higher expected return).

Stock a Has an Expected Return of 17