CMA Final · Strategic Financial Management · Portfolio Theory and Practice
Security M has expected return 12% and Security N has expected return 18%. A portfolio has 70% in M and 30% in N. What is the expected portfolio return?
The expected portfolio return is 13.8%. It is the weighted average of the individual returns: 0.7 times 12% gives 8.4%, and 0.3 times 18% gives 5.4%, totalling 13.8%. Swapping the weights would wrongly give 16.2%.
- A13.8%Correct
- B14.0%
- C15.0%
- D16.2%
Explanation
Expected return = 0.7×12 + 0.3×18 = 8.4 + 5.4 = 13.8%. Option 16.2% results from swapping the weights (0.3×12 + 0.7×18). The simple average, 15%, ignores the weights.
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