Florida Company (FC) and Minnesota Company (MC) are both service companies. Their historical return for the past three years are: FC: - 5%, 15%, 20%; MC: 8%, 8%, 20%. If FC and MC are combined in a portfolio with 50% of the funds invested in each, calculate the expected return on the portfolio.
A) 12%
B) 10%
C) 11%
D) None of the above.

Question

Quizplus · Accepted Answer

To calculate the expected return on the portfolio, we need to take a weighted average of the returns of each company, based on how much of the portfolio is invested in each. 
For FC, the average return is ( (-5% + 15% + 20%) / 3 ) = 10%. 
For MC, the average return is ( (8% + 8% + 20%) / 3 ) = 12%. 
Therefore, the overall expected return on the portfolio is (0.5*10% + 0.5*12%) = 11%. 
Choice C is the closest to this answer.

Florida Company (FC) and Minnesota Company (MC) Are Both Service