What is the expected return on a portfolio comprised of $3,000 in stock K and $5,000 in stock L if the economy is normal?

A) 3.75%
B) 5.25%
C) 5.63%
D) 5.88%
E) 6.80%

Question

What is the expected return on a portfolio comprised of $3,000 in stock K and $5,000 in stock L if the economy is normal?

A) 3.75% 
B) 5.25% 
C) 5.63% 
D) 5.88% 
E) 6.80%

Quizplus · Accepted Answer

To find the expected return of the portfolio, we need to multiply the weight of each stock by its expected return and then sum up these values. Let's assume that stock K has an expected return of 8% and stock L has an expected return of 5%.

Weight of Stock K = 3,000 / (3,000 + 5,000) = 0.375
Weight of Stock L = 5,000 / (3,000 + 5,000) = 0.625

Expected return of portfolio = (0.375 x 8%) + (0.625 x 5%) = 3% + 3.125% = 6.125%

Therefore, the closest answer is C) 5.63%.

What Is the Expected Return on a Portfolio Comprised of $3,000