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CMA Final · Strategic Financial Management · Portfolio Theory and Practice

Asset X has an expected return of 14% and a standard deviation of 20%. Asset Y has an expected return of 10% and a standard deviation of 12%. A portfolio invests 60% in X and 40% in Y. What is the expected return of the portfolio?

The expected portfolio return is 12.4%. It is the weighted average of the individual expected returns, 60% of 14% plus 40% of 10%, which gives 8.4% plus 4.0%. Standard deviations and correlation do not affect expected return, only risk.

  1. A12.0%
  2. B12.4%Correct
  3. C11.6%
  4. D13.2%

Explanation

Expected portfolio return is the weighted average of the asset returns: 0.6 x 14% + 0.4 x 10% = 8.4% + 4.0% = 12.4%. The 12.0% option comes from a simple average that ignores the weights. The 11.6% option reverses the weights (0.4 x 14 + 0.6 x 10).

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