Question

Problem 8-03 A portfolio consists of assets with the following expected returns: Technology stocks 20 % Pharmaceutical stocks 15 Utility stocks 11 Savings account 2 What is the expected return on the portfolio if the investor spends an equal amount on each asset? Round your answer to two decimal places. % What is the expected return on the portfolio if the investor puts 52 percent of available funds in technology stocks, 14 percent in pharmaceutical stocks, 16 percent in utility stocks, and 18 percent in the savings account? Round your answer to two decimal places. %

Answer 1

a). Expected Return = [Weight(i) * Return(i)]

=1

= [0.25 * 20%] + [0.25 * 15%] + [0.25 * 11%] + [0.25 * 2%]

= 5% + 3.75% + 2.75% + 0.50% = 12.00%

b). Expected Return = [Weight(i) * Return(i)]

=1

= [0.52 * 20%] + [0.14 * 15%] + [0.16 * 11%] + [0.18 * 2%]

= 10.4% + 2.1% + 1.76% + 0.36% = 14.62%