You own a portfolio that has $2,000 invested in Stock A and $3,000 invested in Stock B. If the expected returns on these stocks are 9 percent and 12 percent, respectively, what is the expected return on the portfolio? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
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To find the expected return of a portfolio, you can use a weighted average based on the investments in each stock.
First, calculate the weighted average return for each stock based on the investment:
For Stock A:
Weighted return for Stock A = Investment in Stock A × Expected return of Stock A
Weighted return for Stock A = $2,000 \times 0.09
Weighted return for Stock A = $180
For Stock B:
Expected return of Stock B
Weighted return for Stock B = Investment in Stock B × Expected return of Stock B
Weighted return for Stock B = $3,000 \times 0.12
Weighted return for Stock B = $360
Now, add the weighted returns of both stocks:
Total weighted return = Weighted return for Stock A + Weighted return for Stock B
Total weighted return = $180 + $360
Total weighted return= $540
Next, find the total investment in the portfolio:
Total investment in the portfolio = Investment in Stock A + Investment in Stock B
Total investment in the portfolio = $2,000 + $3,000
Total investment in the portfolio = $5,000
Finally, calculate the expected return on the portfolio:
Expected return on the portfolio =
Total weighted return / Total investment in the portfolio ×100
Expected return on the portfolio = $540/$5,000 \times 100
Expected return on the portfolio = 10.80\%