Stock A has an expected return of 20%, and stock B has an expected return of 4%.However, the risk of stock A as measured by its variance is 3 times that of stock B.If the two stocks are combined equally in a portfolio, what would be the portfolio's expected return?
A)4%
B)12%
C)20%
D)Greater than 20%
E)Need more information to answer.

Question

Quizplus · Accepted Answer

Expected return of portfolio = (Weightage of stock A x Expected return of stock A) + (Weightage of stock B x Expected return of stock B)
Let's assume the weightage of both stocks to be 0.5 since they are equally combined in the portfolio.

Expected return of portfolio = (0.5 x 20) + (0.5 x 4) = 12

Thus, the expected return of the portfolio is 12%.

Stock a Has an Expected Return of 20%, and Stock