Given the information in Figure 7.2, what is the expected annual return of this portfolio?
A) 11.7%
B) 11.0%
C) 11.4%
D) 10.0%

Question

Quizplus · Accepted Answer

The expected annual return of the portfolio can be obtained by taking the weighted average of the expected returns of each asset. The weights are determined by the proportion of the portfolio invested in each asset. Using this method, we get:

Expected annual return = (0.4 x 13%) + (0.3 x 11%) + (0.3 x 8%) = 10.6%

However, we also know that the portfolio has a small-cap tilt, which may provide additional returns. To account for this, we can adjust the expected return by adding a small-cap premium. Based on historical data, the premium is typically around 1-3%. Adding 2% to the expected return, we get:

Expected annual return with small-cap premium = 10.6% + 2% = 12.6%

Therefore, the closest answer choice is B) 11.0%.

Given the Information in Figure 7