There are two ways to calculate the expected return of a portfolio. Either calculate the expected return using the value and dividend stream of the portfolio as a whole, or calculate the weighted average of the expected returns of the individual shares that make up the portfolio. Which return is higher? (Select the best choice below.) A. Neither-both calculations give the same answer. B. The weighted average expected return of the individual shares is higher because returns are concave. C. The weighted average expected return of the individual shares is higher because returns are convex. D. Impossible to tell, it depends on the portfolio.
Question
There are two ways to calculate the expected return of a portfolio. Either calculate the expected return using the value and dividend stream of the portfolio as a whole, or calculate the weighted average of the expected returns of the individual shares that make up the portfolio. Which return is higher?
(Select the best choice below.) A. Neither-both calculations give the same answer. B. The weighted average expected return of the individual shares is higher because returns are concave. C. The weighted average expected return of the individual shares is higher because returns are convex. D. Impossible to tell, it depends on the portfolio.
Solution
A. Neither-both calculations give the same answer.
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