Question

You have a portfolio worth $88,500 that has an expected return of 11 percent. The portfolio has $17,900 invested in Stock O, $25,700 invested in Stock P, with the remainder in Stock Q. The expected return on Stock O is 15.6 percent and the expected return on Stock P is 12.3 percent. What is the expected return on Stock Q? 13.07% 11.30% 9.83% 10.52% 8.42%

Answer 1

Expected return of a portfolio is weighted average of return of individual stocks in portfolio.

E(R) = w1 * R1 + w2 * R2 + w3 * R3

Weight of stock O = $17,900/$88,500 = 20.23%

Weight of stock P = $25,700/$88,500 = 29.04%

Amount invested in Q = $88,500 - $17,900 - $25,700 = $44,900

Weight of stock Q = $44,900/$88,500 = 50.73%

11% = (20.23% * 15.6%) + (29.04% * 12.3%) + (50.73% * R3)

11% = 3.16% + 3.57% + (50.73% * R3)

4.27% = 50.73% * R3

R3 = 8.42%