portfolios

Question

A portfolio consists of assets with the following expected returns:
 
                                                      expected return                 weight in portfolio
                      real estate                       16%                                    20%
                    Low quality bonds               15                                       10
                    ATT stock                           12                                       30
                     savings acct                        5                                        40
 
a. What is the expected return on the portfolio?
b. What will be the expected return if the individual reduces the holdings of the AT&T stock to 15 percent and puts the funds into real estate investments?

Answer 1

Amy,

 

Your 16% of real estate has 0.2 weight in portfolio and produces 16 x 0.2 = 3.2 %

Your 15% of real estate has 0.1 weight in portfolio and produces 15 x 0.1 = 1.5 %

Your 12% of real estate has 0.3 weight in portfolio and produces 12 x 0.3 = 3.6 %

Your 05% of real estate has 0.4 weight in portfolio and produces 05 x 0.4 = 2.0 %

Addition will bring you expected return  3.2 + 1.5 + 3.6 + 2.0 = 10.3%

 

In the second case, the identical calculations are:

Your 16% of real estate has now 0.2 + 0.15 = 0.35 weight in portfolio and produces 16 x 0.35 = 5.6 %
Your 15% of real estate has 0.1 weight in portfolio and produces 15 x 0.1 = 1.5 %
Your 12% of real estate has now 0.3 - 0.15 = 0.15 weight in portfolio and produces 12 x 0.15 = 1.8 %
Your 05% of real estate has 0.4 weight in portfolio and produces 05 x 0.4 = 2.0 %

Addition will bring you expected return  5.6 + 1.5 + 1.8 + 2.0 = 10.9%

 

Answer 2

a.)  16(0.2) + 15(0.1) + 12(0.3) + 5(0.4) = 3.2+1.5+3.6+2 = 10.3%

 

b.)  16(0.35) + 15(0.1) + 12(0.15) + 5(0.4) = 5.6+1.5+1.8+2 = 10.9%