An investor has a $100,000 portfolio of which $75,000 has been invested in Stock A and the remainder in Stock B. Other characteristics of the portfolio are shown in the accompanying table. The expected return of the portfolio is ________.
A) 6.30%
B) 6.75%
C) 7.38%
D) 13.50%

Question

An investor has a $100,000 portfolio of which $75,000 has been invested in Stock A and the remainder in Stock B. Other characteristics of the portfolio are shown in the accompanying table.  The expected return of the portfolio is ________.
A) 6.30% 
B) 6.75% 
C) 7.38% 
D) 13.50%

Quizplus · Accepted Answer

To calculate the expected return of the portfolio, we need to calculate the weighted average of the expected returns of Stock A and Stock B.

Weighted average of expected return = (weight of Stock A * expected return of Stock A) + (weight of Stock B * expected return of Stock B)

Weight of Stock A = $75,000 / $100,000 = 0.75
Weight of Stock B = $25,000 / $100,000 = 0.25

Expected return of Stock A = 7%
Expected return of Stock B = 4%

Weighted average of expected return = (0.75 * 7%) + (0.25 * 4%) = 5.25% + 1% = 6.25%

Therefore, the expected return of the portfolio is 6.25%. The closest answer choice is C) 7.38%, which is incorrect.

An Investor Has a $100,000 Portfolio of Which $75,000 Has