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CMA Intermediate · Financial Management and Business Data Analytics · Risk and Return

A portfolio has 60% invested in Stock A (expected return 15%) and 40% in Stock B (expected return 10%). What is the expected return of the portfolio?

The portfolio's expected return is 13%. It is the weighted average of the individual expected returns, using investment proportions as weights: 0.60 x 15% plus 0.40 x 10% gives 9% plus 4%. A simple average would ignore the unequal weights and give a wrong answer.

  1. A12.5%
  2. B13.0%Correct
  3. C11.5%
  4. D25.0%

Explanation

Portfolio expected return is the weighted average: 0.60 x 15% + 0.40 x 10% = 9% + 4% = 13%. The 12.5% figure comes from a simple average that ignores the weights. 25% adds the two returns.

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