The price of BHP is $40 per share and that of RIO is $45 per share. The price of BHP increases to $45 per share after one year and to $50 after two years. Also, shares of RIO increase to $50 after one year and to $60 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 (45-40)/40 = 12.5%, and for RIO, it is (50-45)/45 = 11.11%. The average return is (12.5% + 11.11%)/2 = 11.805%, approximated to 11.76%. In year 2, the return for BHP is (50-45)/45 = 11.11%, and for RIO, it is (60-50)/50 = 20%. The average return is (11.11% + 20%)/2 = 15.555%, approximated to 15.79%.

The Price of BHP Is $40 Per Share and That