You own a portfolio that has $2,500 invested in Stock A and $3,500 invested in Stock B. If the expected returns on these stocks are 10 percent and 13 percent, respectively, what is the expected return on the portfolio? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Problem 13-2 Portfolio Expected Return [LO1]
You own a portfolio that has $2,500 invested in Stock A and $3,500 invested in Stock B. If the expected returns on these stocks are 10 percent and 13 percent, respectively, what is the expected return on the portfolio? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer

The expected return of a portfolio is the sum of the weight of each asset times the expected return of each asset. The total value of the portfolio is:

Total portfolio value = $2,500 + 3,500

Total portfolio value = $6,000

  

So, the expected return of this portfolio is:

  

E(RP) = ($2,500/$6,000)(.10) + ($3,500/$6,000)(.13)

E(RP) = .1175, or 11.75%