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You wish to invest in a portfolio of stocks A (50%) and B (50%). The risk free rate is 2%. A B Expected Return (%) 10 18 Beta 1.2 1.8 Correlation coefficient between returns = 0.3 What’s the portfolio rate of return as a percentage? Do not round.

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Shahzaibfaraz

Answer:

The portfolio rate of return is 14%

Explanation:

The portfolio's rate of return is the weighted average of the expected rate of return =s of the individual stocks that form up the portfolio. Thus the formula for rate of return of a portfolio is,

Portfolio rate of return = wA * rA + wB * rB

Where,

  • wA is the weight of security A in the portfolio
  • wB is the weight of Security B in the portfolio
  • rA is the rate of return of Stock A
  • rB is the rate of return of Stock B

So, the portfolio return is,

rP or Portfolio return = 0.5 * 0.1 + 0.5 * 0.18

rP = 0.14 or 14%

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