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You own a portfolio that is 19 percent invested in Stock X, 34 percent in Stock Y, and 47 percent...

Question:

You own a portfolio that is 19 percent invested in Stock X, 34 percent in Stock Y, and 47 percent in Stock Z. The expected returns on these three stocks are 10 percent, 13 percent, and 15 percent, respectively.

What is the expected return on the portfolio?

Relationship between Stocks and portfolio Returns:

Portfolio returns comprise of returns from stocks making the portfolio. The rate of return from a portfolio may be higher or lower than individual stock returns. However, the portfolio return is faced with minimal risks compared to stock returns.

Answer and Explanation:

The portfolio returns are estimated by applying the formula below:

{eq}\text{Expected return on the Portfolio}=\sum{\text{Return on stock}\times \text{ Weight of stock}} {/eq}

StocksExpected returns Weights
X10%19%
Y13%34%
Z15%47%

{eq}\text{Expected return on the Portfolio}=10\% \times \dfrac{19}{100}+13\% \times \dfrac{34}{100}+15\% \times \dfrac{47}{100} {/eq}

{eq}\text{Expected return on the Portfolio}=13.37\% {/eq}


Learn more about this topic:

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Portfolio Weight, Return & Variance: Definition & Examples

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Chapter 12 / Lesson 1
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A portfolio can be designed in several different ways. It is important to understand the basics of a portfolio before building and managing one. In this lesson, we will go over the weight, return, and variance of a portfolio.


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