A stock portfolio consists of three stocks. Stock A represents 30% of the portfolio and has a return of 5%. Stock B represents 40% of the portfolio and has a return of 10%. Stock C represents the remaining 30% of the portfolio and has a return of 8%. What is the average return of the portfolio?
- A7.9%
- B7.5%
- C7.2%
- D8.1%
Solution & Step-by-step Explanation
The average return of the portfolio can be found using the weighted average method:
Weighted Average Return=(W
A
×R
A
)+(W
B
×R
B
)+(W
C
×R
C
)
Where:
W
A
=30%=0.30, R
A
=5%
W
B
=40%=0.40, R
B
=10%
W
C
=30%=0.30, R
C
=8%
Substitute the values:
Average Return=(0.30×5)+(0.40×10)+(0.30×8)
Average Return=1.5+4.0+2.4=7.9%
Weighted Average Return=(W
A
×R
A
)+(W
B
×R
B
)+(W
C
×R
C
)
Where:
W
A
=30%=0.30, R
A
=5%
W
B
=40%=0.40, R
B
=10%
W
C
=30%=0.30, R
C
=8%
Substitute the values:
Average Return=(0.30×5)+(0.40×10)+(0.30×8)
Average Return=1.5+4.0+2.4=7.9%