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 ร 6% = 1.2 %ย Stock B: 0.30 ร 8% = 2.4%ย Stock C: 0.20 ร 4% = 0.8%ย Stock D: 0.30 ร (โ5%) = โ1.5%ย Now, sum the weighted returns to find the total portfolio return = 1.2% + 2.4% + 0.8% + (โ1.5%) = 2.9%ย