Question

c) A portfolio comprises three stocks, A, B and C. Stock A is 25% of the portfolio and has a return of 18%; stock B is 40% of the portfolio and has a return of 24%; and stock C completes the portfolio. Find the return of stock C if the overall expected return of the portfolio is 19.7%. [5 marks]

Answer 1

Weight of Stock A = 25%
Return of Stock A = 18%
Weight of Stock B = 40%
Return of Stock B = 24%
Weight of Stock C = 35%
Portfolio Return = 19.70%

Let Return of Stock C be x

Portfolio Return = Weight of Stock A * Return of Stock A + Weight of Stock B * Return of Stock B + Weight of Stock C * Return of Stock C
0.1970 = 0.25 * 0.18 + 0.40 * 0.24 + 0.35 * x
0.1970 = 0.0450 + 0.0960 + 0.35 * x
0.1970 = 0.1410 + 0.35 * x
0.0560 = 0.35 * x
x = 0.16 or 16.00%

So, Return of Stock C is 16.00%