Don has $3,000 invested in AT&T with an expected return of 11.6%; $10,000 in IBM with an expected return of 12.8%; and $6,000 in GM with an expected return of 12.2%. What is Don's expected return on his portfolio?
A) 12.42%
B) 12.20%
C) 11.81%
D) Cannot be determined

Question

Quizplus · Accepted Answer

First, we need to calculate the weighted average return of Don's portfolio. Weighted average return is calculated by multiplying the weight of each investment by its expected return, and then summing up these values. The weight of each investment is calculated by dividing the amount invested in each investment by the total amount invested.

Weight of AT&T = $3,000 / ($3,000 + $10,000 + $6,000) = 0.150
Weight of IBM = $10,000 / ($3,000 + $10,000 + $6,000) = 0.500
Weight of GM = $6,000 / ($3,000 + $10,000 + $6,000) = 0.350

Now, we can calculate the weighted average return as follows:

Weighted Average Return = (0.150 x 11.6%) + (0.500 x 12.8%) + (0.350 x 12.2%) 
= 1.74% + 6.40% + 4.27%
= 12.41%

Therefore, Don's expected return on his portfolio is 12.41%, which is closest to option A (12.42%).

Don Has $3,000 Invested in AT&T with an Expected Return