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A portfolio has $70,000 of bonds and $30,000 of stock
A portfolio has $70,000 of bonds and $30,000 of stock. The bonds are 80% likely to have a 10% return and 20% likely to have a 0% return. The stock is 50% likely to have a 20% return and 50% likely to have a 10% loss. What is the expected return?
7.1%
2.9%
5.9%
13%
Expert Solution
Answer: 7.1 %
Step-by-step explanation
Expected return of stock
= probability × rate of return
=50% of 20 + 50% of (-10)
= 10 - 5
= 5 %
Expected return of bond
= probability × rate of return
=80% of 10 + 20% of 0
= 8%
Hence return of portfolio
=
Weight of stock× expected return of stoc
+
Weight of bond × expected return of bond
=( 70000/ 100000 ) × 8 + (30000/100000) × 5
= 5.6 + 1.5
= 7.1 %
Hence expected rate of return of portfolio
= 7.1 %
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