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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 choices1%7%11%5%

Question

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 choices1%7%11%5%

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Solution

To calculate the expected return on the portfolio, you need to multiply the expected return of each stock by the proportion of the portfolio that is invested in that stock, and then add these values together.

Here's how you do it:

  1. Calculate the portion of the return contributed by Stock A: 0.10 (expected return of Stock A) * 0.40 (proportion of portfolio in Stock A) = 0.04 or 4%

  2. Calculate the portion of the return contributed by Stock B: 0.05 (expected return of Stock B) * 0.60 (proportion of portfolio in Stock B) = 0.03 or 3%

  3. Add these two values together to get the total expected return on the portfolio: 0.04 (from Stock A) + 0.03 (from Stock B) = 0.07 or 7%

So, the expected return on the portfolio of Stock A and Stock B is 7%.

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