Stock A has an expected return of 8%, stock B has an expected return of 2%, and the return on Treasury-Bills is 4%. You buy $200 of A, short $100 of B and invest the short proceeds in Treasury Bills. What is the expected return of your portfolio?

Question

Jamal Ray

Business

5 July, 22:10

Stock A has an expected return of 8%, stock B has an expected return of 2%, and the return on Treasury-Bills is 4%. You buy $200 of A, short $100 of B and invest the short proceeds in Treasury Bills. What is the expected return of your portfolio?

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Answers (1)

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Elise Mcdaniel · Answer 1

The expected return of your portfolio is 6.02%

Explanation:

Stock Value Expected Rate of return Weightage

A $200 8% $200/$300 = 0.67

B $100 2% $100/$300 = 0.33

Expected Rate of return = (Expected rate of return Stock A x Weightage of Stock A) + (Expected rate of return Stock B x Weightage of Stock B)

Expected Rate of return = (8% x 0.667) + (2% x 0.33)

Expected Rate of return = 0.0536 + 0.0066 = 0.0602 = 6.02%