CMA Final · Strategic Financial Management · Portfolio Theory and Practice
An investor holds two securities. Security P has an expected return of 12% and Security Q has an expected return of 18%. If 40% of the portfolio is invested in P and 60% in Q, what is the expected return of the portfolio?
The expected return of the portfolio is 15.6%. It is the weighted average of the individual returns: 40% of 12% gives 4.8% and 60% of 18% gives 10.8%, which add up to 15.6%. A simple average would ignore the weights.
- A15.0%
- B15.6%Correct
- C16.0%
- D14.4%
Explanation
Portfolio return = 0.40 x 12 + 0.60 x 18 = 4.8 + 10.8 = 15.6%. The 15.0% figure comes from a simple average, which ignores the unequal weights. The 14.4% figure swaps the weights (0.6 x 12 + 0.4 x 18).
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