NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Portfolio Construction Process
A portfolio is split 50% in Fund A with an expected return of 12% and 50% in Fund B with an expected return of 8%. What is the expected return of the portfolio?
The expected return is 10%. It is the weighted average of the two funds' returns: half of 12% plus half of 8%, which is 6% plus 4%. Returns are never simply added; each is multiplied by its portfolio weight.
- A20%
- B4%
- C10%Correct
- D9.6%
Explanation
Expected portfolio return is the weighted average: 0.5 x 12% + 0.5 x 8% = 6% + 4% = 10%. Adding the returns gives 20%, which ignores weights. Checking: the midpoint of 8% and 12% with equal weights is 10%.
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