Stock A has an expected return of 10% per year and Stock B has an expected return of 5%. If 40% of a portfolio's funds are invested in Stock A and the rest in Stock B, what is the expected return on the portfolio of Stock A and Stock B?

Group of answer choices

5%

1%

11%

7%

To find the expected return on a portfolio, we use the formula for the weighted average of the returns of the assets in the portfolio:

\[
\text{Expected Return of Portfolio} = (w_A \times r_A) + (w_B \times r_B)
\]

Where:
- \( w_A \) and \( w_B \) are the proportions of the portfolio invested in Stock A and Stock B, respectively.
- \( r_A \) and \( r_B \) are the expected returns of Stock A and Stock B, respectively.

Given:
- Expected return of Stock A, \( r_A = 10\% \) or 0.10.
- Expected return of Stock B, \( r_B = 5\% \) or 0.05.
- Proportion invested in Stock A, \( w_A = 40\% \) or 0.40.
- Proportion invested in Stock B, \( w_B = 60\% \) or 0.60 (since \( 1 - w_A = 0.60 \)).

Now, plug the values into the formula:

\[
\text{Expected Return of Portfolio} = (0.40 \times 0.10) + (0.60 \times 0.05)
\]

\[
= 0.04 + 0.03 = 0.07
\]

So, the expected return on the portfolio is **7%**.

The correct answer is **7%**.

Would you like more details or have any questions?

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Here are 5 related questions to expand your understanding:

1. How does diversification affect the risk and return of a portfolio?
2. What is the difference between expected return and actual return in investments?
3. How does changing the proportion of Stock A in the portfolio affect the expected return?
4. Can expected return alone determine the best investment strategy?
5. How would you calculate the risk or volatility of this portfolio?

**Tip**: When building portfolios, consider not just expected returns but also the correlation and volatility of the assets to manage risk effectively.

Stock A has an expected return of 10% per year and Stock B has an expected return of 5%. If 40% of a portfolio's funds are invested in Stock A and the rest in Stock B, what is the expected return on the portfolio of Stock A and Stock B?

This problem involves calculating the expected return on a portfolio with Stock A (10% return) and Stock B (5% return). By applying the weighted average formula, we find the expected portfolio return. A great exercise in portfolio management concepts for finance students.

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