Question
A stock portfolio consists of four stocks. Stock A
represents 20% of the portfolio and has a return of 6%. Stock B represents 30% of the portfolio and has a return of 8%. Stock C represents 20% of the portfolio and has a return of 4%. Stock D represents the remaining 30% of the portfolio and has a negative-return of 5%. What is the average return of the portfolio?Solution
First, convert the percentages to decimals for calculation: Stock A: 20% = 0.20 Stock B: 30% = 0.30 Stock C: 20% = 0.20 Stock D: 30% = 0.30 Next, calculate the weighted return for each stock: Stock A: 0.20 × 6% = 1.2 % Stock B: 0.30 × 8% = 2.4% Stock C: 0.20 × 4% = 0.8% Stock D: 0.30 × (−5%) = −1.5% Now, sum the weighted returns to find the total portfolio return = 1.2% + 2.4% + 0.8% + (−1.5%) = 2.9%
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