Question

Your retirement portfolio comprises 300 shares of the S&P 500 fund (SPY) and 100 shares of iShares Barclays Aggregate Bond Fund (AGG). The price of SPY is $138 and that of AGG is $97. If you expect the return on SPY to be 15% in the next year and the return on AGG to be 7%, what is the expected return for your retirement portfolio? O A. 13.48% OB. 10.79% O C. 12.81% OD. 12.13%

Answer 1

Solution:
	Answer is   A. 13.48%
Working Notes:
	Expected return of portfolio = Weighted average expected return of Individual assets
	Expected return of portfolio = Weight of SPY x Er SPY + Weight of AGG x Er AGG
Notes:	weight of each components of portfolio is not given we have to compute weight of each components before getting expected return of the portfolio.
	Weight of SPY in the portfolio
	= (Number of shares of SPY x Price of SPY per share)/(Number of shares of SPY x Price of SPY per share + Number of shares of AGG x Price of AGG per share)
	=(300 x $138)/((300 x $138) + (100 x $97))
	=0.810176
	Weight of AGG in the portfolio
	= (Number of shares of AGG x Price of AGG per share)/(Number of shares of SPY x Price of SPY per share + Number of shares of AGG x Price of AGG per share)
	=(100 x $97)/((300 x $138) + (100 x $97))
	=0.189824
	Expected return on SPY Er SPY = 15%
	Expected return on SPY Er AGG = 7%
	Expected return of portfolio = Weighted average expected return of Individual assets
	Expected return of portfolio = Weight of SPY x Er SPY + Weight of AGG x Er AGG
	=0.810176 x 15% + 0.189824 x 7%
	=0.13481408
	=13.48%
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