An investor has the following portfolio set out below. What is the expected return on the portfolio? Record your answer to the nearest four decimal places (e.g., If your answer is 3.40%, then report 0.0340). Company Return Beta $ invested TTYL Ltd 0.217 2.1 39,000 FML Ltd 0.042 0.35 28,000 IDK Ltd 0.088 0.57 19,000 Government Bonds 0.022 36,000
Question
An investor has the following portfolio set out below. What is the expected return on the portfolio? Record your answer to the nearest four decimal places (e.g., If your answer is 3.40%, then report 0.0340).
Company
Return
Beta
$ invested
TTYL Ltd
0.217
2.1
39,000
FML Ltd
0.042
0.35
28,000
IDK Ltd
0.088
0.57
19,000
Government Bonds
0.022
36,000
Solution
The expected return on a portfolio is calculated by multiplying the return of each investment by its proportion in the portfolio, and then summing these results.
Here's how to calculate it for this portfolio:
-
First, calculate the total investment in the portfolio. This is the sum of the investments in each company and the government bonds.
Total investment = 28,000 (FML Ltd) + 36,000 (Government Bonds) = $122,000
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Next, calculate the proportion of the total investment that each investment represents. This is done by dividing the investment in each company by the total investment.
Proportion of TTYL Ltd = 122,000 = 0.3197 Proportion of FML Ltd = 122,000 = 0.2295 Proportion of IDK Ltd = 122,000 = 0.1557 Proportion of Government Bonds = 122,000 = 0.2951
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Then, multiply the return of each investment by its proportion in the portfolio.
Expected return from TTYL Ltd = 0.217 * 0.3197 = 0.0694 Expected return from FML Ltd = 0.042 * 0.2295 = 0.0096 Expected return from IDK Ltd = 0.088 * 0.1557 = 0.0137 Expected return from Government Bonds = 0.022 * 0.2951 = 0.0065
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Finally, sum these results to find the expected return on the portfolio.
Expected return on the portfolio = 0.0694 + 0.0096 + 0.0137 + 0.0065 = 0.0992 or 9.92%
So, the expected return on the portfolio is 0.0992 or 9.92%.
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