a portfolio consists of assests with the following expected

a portfolio consists of assests with the following expected returns:

technology stocks 20%

pharmaceutical stocks 15%

utility stocks 10%

savings account 5%

a. what is the expected return on the portfolio if the investor spends an equal amount on each assests?

b. what is the expected return on the portfolio if the investor puts 50% of available funds in technology stocks, 10% in pharmaceutical stocks, 24% in utility stocks, and 16% in the savings account?

Solution

a. Let the investor spends Rs.x in every assets.

then total expected returns = 0.2x + 0.15x + 0.1x + 0.05x = 0.5x

total invested amount = 4x

so, expected return from the portfolio = (0.5/4) = 0.125 = 12.5%

b. let the total available fund is x.

so, investor puts 0.5x in technology stocks, 0.1x in pharmaceutical stocks, 0.24x in utility stocks and 0.16x in saving account.

So, expected return from technology stock = (0.5*0.2)x = 0.01x

expected return from pharmaceutical stock = (0.1*0.15)x = 0.015x

expected return from utility stock = (0.24*0.1)x = 0.024x

expected return from savings account = (0.26*0.05)x = 0.013x

So, total expected return = (0.01+0.015+0.024+0.013)x = 0.062x

total invested amount = x

so, expected return = 0.062 = 6.2%