Question

You have a portfolio worth $53,500 that has an expected return of 12.9 percent. The portfolio has $16,500 invested in Stock 0, $24,300 invested in Stock P, with the remainder in Stock Q. The expected return on Stock O is 17.7 percent and the expected return on Stock P is 10.9 percent. What is the expected return on Stock Q? Multiple Choice Ο 12.90% Ο 10.49% Ο 11.44% Ο 13.83% Ο 12.24%

Answer 1

Portfolio returns=(Weight of stock O)*(Expected return on stock O)+(Weight of stock P)*(Expected return on stock P)+(Weight of stock Q)*(Expected return on stock Q)

Total value of the portfolio=53500

Weight of stock O=16500/53500=0.308411215
Weight of stock P=24300/53500=0.454205607
Weight of stock Q=(53500-16500-24300)/53500=0.237383178

Suppose the expected return on stock Q be x.
Portfolio returns=(0.308411215)*(17.7%)+(0.454205607)*(10.9%)+(0.237383178)*(x)
12.9%=(0.308411215)*(17.7%)+(0.454205607)*(10.9%)+(0.237383178)*(x)
0.129=0.054588785+0.049508411+(0.237383178)*(x)
0.129-0.054588785-0.049508411=(0.237383178)*(x)
0.024902804=(0.237383178)*(x)
0.1049=(x)
=>x=10.49%
So, the expected return on stock Q=10.49%