Question

You are considering investing in three stocks with the following expected returns: Stock A: 7% Stock B: 12% Stock C: 20%. What is the expected return on the portfolio if an equal amount is invested in each stock? What would be the expected return if 50 percent of your funds is invested in stock A and the remaining funds are split evenly between stocks B and C?

Answer 1

Expected return is the amount of money that an investor expects to earn based on his capital investment. The expected return for a portfolio can be calculated by multiplying the individual returns of each stock by the percentage of the fund from the portfolio that is invested in that particular investment and then summing up the result.

From the given information,

Expected return of

Stock A= 7% Stock B= 12% Stocks C= 20%

1] If an equal amount is invested in each stock,

The expected return of the portfolio= Expected return of stock A x Percentage of the portfolio it holds +

Expected return of stock B x Percentage of the portfolio it holds +

Expected return of stock C x Percentage of the portfolio it holds

= 7%(0.3333) + 12%(0.3333) + 20%(0.3333)

=2.3331% + 3.9996% + 6.6666%

= 12.9987%

Expected return on the portfolio if an equal amount os invested in each stock= 12.9987%

2] If 50% of our fund is invested in stock A and the remaining fund is split evenly between stock B and C, the expected return of the portfolio would be

   =Expected return of stock A x Percentage of the portfolio it holds +

Expected return of stock B x Percentage of the portfolio it holds +

Expected return of stock C x Percentage of the portfolio it holds

=7%(0.50) + 12%(0.25) + 20%(.25)

=3.5% + 3% + 5%

= 11.5%

The expected return of the portfolio if 50 percent of our fund is invested in stock A and the remaining fund is evenly split between stock B and C is 11.5%

Note: I have rounded off the calculation to 4 decimal places

Do leave me an upvote if this answer was helpful. In case of any follow-up questions, feel free to comment.