The price of BHP is $30 per share and that of RIO is $50 per share. The price of BHP increases to $35 per share after one year and to $40 after two years. Also, shares of RIO increase to $60 after one year and to $70 after two years. If your portfolio comprises 100 shares of each security, what is your portfolio return in year 1 and year 2? Assume no dividends are paid.

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In year 1, the return for BHP is (35 - 30) / 30 = 16.67%, and for RIO, it is (60 - 50) / 50 = 20%. The average return is (16.67% + 20%) / 2 = 18.335%, but since the portfolio has equal value in both stocks, we calculate the total return by considering the total initial and final values. Initial value = (100 * $30) + (100 * $50) = $3,000 + $5,000 = $8,000. Final value after year 1 = (100 * $35) + (100 * $60) = $3,500 + $6,000 = $9,500. Year 1 return = ($9,500 - $8,000) / $8,000 = 18.75%. In year 2, for BHP, the return is (40 - 35) / 35 = 14.29%, and for RIO, it is (70 - 60) / 60 = 16.67%. The average return is (14.29% + 16.67%) / 2 = 15.48%, but again, we calculate based on total values. Final value after year 2 = (100 * $40) + (100 * $70) = $4,000 + $7,000 = $11,000. Year 2 return = ($11,000 - $9,500) / $9,500 = 15.79%.

The Price of BHP Is $30 Per Share and That