Question

Calculate the expected return of a portfolio given the following weights and expected returns for each asset held in the portfolio.
Stock A expected return E(ra) = 12%, weight W(a) = 25%
Stock B expected return E(rb) = 8%, weight W(b) = 25%
Stock C expect return E(rc) = 4%, weight W(c) = 50%

Write out the formula in words or symbols, AND write out the formula plugging in the numbers AND THEN provide the answer.

Answer 1

Expected return of a portfolio is weighted average of the return of the individual constituents within portfolio.

E(R) = Weight1 * Return1 + Weight2 * Return2 + Weight3 * Return3

E(R) = 25% * 12% + 25% * 8% + 50% * 4%

E(R) = 3% + 2% + 2%

E(R) = 7%