Question

Use the following table: 

Series	Average return
Large stocks	11.78%
Small stocks	16.48
Long-term corporate bonds	6.24
Long-term government bonds	6.10
U.S. Treasury bills	3.84
Inflation	3.10

a. Determine the return on a portfolio that was equally invested in large-company stocks and long-term corporate bonds. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) 

b. What was the return on a portfolio that was equally invested in small stocks and Treasury bills? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

a

Weight of Large cap stock = 0.5

Weight of LT corp bonds = 0.5

Exp ret. of Portfolio = Weight of Large cap stock*Exp ret. of Large cap stock+Weight of LT corp bonds*Exp ret. of LT corp bonds

Exp ret. of Portfolio = 11.78*0.5+6.24*0.5

Exp ret. of Portfolio = 9.01

b

Weight of small cap stock = 0.5

Weight of T bills = 0.5

Exp ret. of Portfolio = Weight of small cap stock*Exp ret. of small cap stock+Weight of T bills*Exp ret. of T bills

Exp ret. of Portfolio = 16.48*0.5+3.84*0.5

Exp ret. of Portfolio = 10.16

Answer 2

SOLUTION :

a.

Portfolio return 

(Equally invested large company socks and long-term corporate bonds)

= 0.50 * 11.78 + 0.50 * 6.24

=  9.01 % (ANSWER)

b.

Portfolio return 

(Equally invested small socks and treasury bills)

= 0.50 * 16.48 + 0.50 * 3.84

=  10.16 % (ANSWER)