A stock portfolio consists of four stocks. Stock A represents 20% of the portfolio and has a return of 6%. Stock B represents 30% of the portfolio and has a return of 8%. Stock C represents 20% of the portfolio and has a return of 4%. Stock D represents the remaining 30% of the portfolio and has a negative return of 5%. What is the average return of the portfolio?

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Accepted Answer

To find the average return of the portfolio, we calculate the weighted average of the returns of the stocks based on their portfolio weights.

Step 1: Identify weights and returns:
- Stock A: weight = 20% = 0.20, return = 6%
- Stock B: weight = 30% = 0.30, return = 8%
- Stock C: weight = 20% = 0.20, return = 4%
- Stock D: weight = 30% = 0.30, return = -5%

Step 2: Calculate weighted returns:
- A: 0.20 * 6 = 1.2
- B: 0.30 * 8 = 2.4
- C: 0.20 * 4 = 0.8
- D: 0.30 * (-5) = -1.5

Step 3: Sum weighted returns:
1.2 + 2.4 + 0.8 - 1.5 = 2.9

Step 4: The average return of the portfolio is 2.9%.

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