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.