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CMA Final · Strategic Financial Management · Portfolio Theory and Practice

Asset X has an expected return of 12% and standard deviation of 20%. Asset Y has an expected return of 8% and standard deviation of 10%. A portfolio invests 60% in X and 40% in Y. What is the expected return of the portfolio?

The expected return of a portfolio is the weighted average of the component returns. Here, 60% x 12% plus 40% x 8% gives 7.2% plus 3.2%, which equals 10.4%. Risk and correlation do not affect expected return, only the weights and individual expected returns do.

  1. A10.0%
  2. B10.4%Correct
  3. C9.6%
  4. D11.2%

Explanation

Expected portfolio return is the weighted average of the individual returns: 0.6 x 12 + 0.4 x 8 = 7.2 + 3.2 = 10.4%. The 10.0% option wrongly uses equal weights. The 9.6% option swaps the weights (0.4 x 12 + 0.6 x 8).

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