An investor decides to invest in shares in two companies, rather than in just one. The expected returns of each company are RA and RB (where RB RA). Which statement best describes RP, the expected return from the portfolio?

Question

An investor decides to invest in shares in two companies, rather than in just one. The expected returns of each company are RA and RB (where RB > RA). Which statement best describes RP, the expected return from the portfolio?

Quizplus · Accepted Answer

The expected return of a portfolio is a weighted average of the expected returns of the individual investments, where the weights are determined by the proportion of the investment in each company. Assuming equal investment in both companies, the expected return of the portfolio RP can be calculated as: RP = (RA + RB) / 2 Since RB > RA, this implies that (RA + RB) / 2 > RA and (RA + RB) / 2 < RB. Therefore, RA < RP < RB Hence, the correct answer is D.

An Investor Decides to Invest in Shares in Two Companies