CFA Level I · CFA Level I Exam · Portfolio Risk and Return: Part I
A portfolio consists of 40% in Asset X with an expected return of 8% and 60% in Asset Y with an expected return of 12%. The expected return of the portfolio is closest to:
The expected return is 10.4%. A portfolio's expected return is the weighted average of its assets' expected returns, so 40% times 8% plus 60% times 12% gives 3.2% plus 7.2%. The simple average of 10.0% wrongly ignores the weights.
- A10.0%
- B10.4%Correct
- C11.2%
Explanation
Portfolio expected return is the weighted average of the asset expected returns: 0.40 × 8% + 0.60 × 12% = 3.2% + 7.2% = 10.4%. A simple average of 10.0% ignores the unequal weights.
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