Suppose that 40 of your portfolio consists of riskfree bonds

Suppose that 40% of your portfolio consists of risk-free bonds that have an annual rate of return of 4%, and the other 60% of your portfolia consists of risky stocks. If your portfolio\'s average annual return is 5.8%, what was the annual rate of return of your stocks?

A) 6%

B)8%

C)7%

D)9%

Solution

If return for risky stocks be R, then

40% x 4% + 60% x R = 5.8%

1.6% + 60% x R = 5.8%

60% x R = (5.8 - 1.6)% = 4.2%

R = 4.2% / 60% = 0.07

Or, rate of return on risky stocks is 7%.

Correct option (C).