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Four securities have the following expected returns: A ¼ 15%, B ¼ 12%, C ¼ 30%,...

Four securities have the following expected returns: A ¼ 15%, B ¼ 12%, C ¼ 30%, and D ¼ 22% Calculate the expected returns for a portfolio consisting of all four securities under the following conditions: a. The portfolio weights are 25 percent each. b. The portfolio weights are 10 percent in A, with the remainder equally divided among the other three stocks. c. The portfolio weights are 10 percent each in A and B, and 40 percent each in C and D.

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Answer #1

a). Expected Return = [Weight(i) * Return(i)]

= [0.25 * 15%] + [0.25 * 12%] + [0.25 * 30%] + [0.25 * 22%]

= 3.75% + 3% + 7.50% + 5.50% = 19.75%

b). Expected Return = [Weight(i) * Return(i)]

= [0.10 * 15%] + [0.30 * 12%] + [0.30 * 30%] + [0.30 * 22%]

= 1.50% + 3.60% + 9.00% + 6.60% = 20.70%

c). Expected Return = [Weight(i) * Return(i)]

= [0.10 * 15%] + [0.10 * 12%] + [0.40 * 30%] + [0.40 * 22%]

= 1.50% + 1.20% + 12% + 8.80% = 23.50%

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