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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Introduction to Modern Portfolio Theory

Rohit holds two assets in a portfolio: Asset A with weight 60% and expected return 10%, and Asset B with weight 40% and expected return 15%. What is the expected return of the portfolio?

The expected portfolio return is 12%. It is the weighted average of the asset returns: 60% times 10% gives 6%, and 40% times 15% gives 6%, totalling 12%. A simple average of 12.5% is wrong because it ignores the portfolio weights.

  1. A12.0%Correct
  2. B12.5%
  3. C11.0%
  4. D13.0%

Explanation

Portfolio return = 0.6 x 10% + 0.4 x 15% = 6% + 6% = 12%. A simple average of 10% and 15% gives 12.5%, which ignores the weights. Reversing the weights gives 0.4x10 + 0.6x15 = 13%.

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