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CFA Level I · CFA Level I Exam · The Return and Risk of a Financial Portfolio

A portfolio is invested 40% in Asset X, which has an expected return of 10%, and 60% in Asset Y, which has an expected return of 5%. The expected return of the portfolio is closest to:

The expected return is 7.0%. A portfolio's expected return is the weighted average of its assets' expected returns, so 0.40 × 10% plus 0.60 × 5% gives 4% plus 3%. The simple average of 7.5% wrongly ignores the portfolio weights.

  1. A6.0%
  2. B7.0%Correct
  3. C7.5%

Explanation

The portfolio expected return is the weighted average of the asset expected returns: 0.40 × 10% + 0.60 × 5% = 4.0% + 3.0% = 7.0%. Using a simple average (7.5%) ignores the unequal weights.

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