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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Portfolio Construction Process

A portfolio is 60% in equity with an expected return of 12% and 40% in debt with an expected return of 7%. What is the expected return of the portfolio?

The expected return is 10.0%. It is the weighted average of component returns: 60% of 12% gives 7.2%, and 40% of 7% gives 2.8%, which add up to 10.0%. Weights must be applied to each asset's return, not a simple average.

  1. A9.5%
  2. B10.0%
  3. C10.8%Correct
  4. D9.0%

Explanation

Expected return = 0.6 x 12 + 0.4 x 7 = 7.2 + 2.8 = 10.0%. Check: 7 + 0.6 x 5 = 10.0%. So the correct value is 10.0%; 9.5% is a simple average mistake (9.5), 10.8% swaps weights (0.4x12+0.6x7=9.0 is the 9.0 option, and 10.8 is a miscalculation).

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