Solution: | |||
Answer is A. 13.48% | |||
Working Notes: | |||
Expected return of portfolio = Weighted average expected return of Individual assets | |||
Expected return of portfolio = Weight of SPY x Er SPY + Weight of AGG x Er AGG | |||
Notes: | weight of each components of portfolio is not given we have to compute weight of each components before getting expected return of the portfolio. | ||
Weight of SPY in the portfolio | |||
= (Number of shares of SPY x Price of SPY per share)/(Number of shares of SPY x Price of SPY per share + Number of shares of AGG x Price of AGG per share) | |||
=(300 x $138)/((300 x $138) + (100 x $97)) | |||
=0.810176 | |||
Weight of AGG in the portfolio | |||
= (Number of shares of AGG x Price of AGG per share)/(Number of shares of SPY x Price of SPY per share + Number of shares of AGG x Price of AGG per share) | |||
=(100 x $97)/((300 x $138) + (100 x $97)) | |||
=0.189824 | |||
Expected return on SPY Er SPY = 15% | |||
Expected return on SPY Er AGG = 7% | |||
Expected return of portfolio = Weighted average expected return of Individual assets | |||
Expected return of portfolio = Weight of SPY x Er SPY + Weight of AGG x Er AGG | |||
=0.810176 x 15% + 0.189824 x 7% | |||
=0.13481408 | |||
=13.48% | |||
Please feel free to ask if anything about above solution in comment section of the question. |
Your retirement portfolio comprises 300 shares of the S&P 500 fund (SPY) and 100 shares of...
Your retirement portfolio comprises 100 shares of the Standard & Poor's 500 fund (SPY) and 100 shares of Shares Barclays Aggregate Bond Fund (AGG). The price of SPY is $118 and that of AGG is $99. If you expect the return on SPY to be 10% in the next year and the return on AGG to be 5%, what is the expected return for your retirement portfolio? OA 6.56% OB. 8.88% OC. 772% OD. 6.95%