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Maria has a portfolio consisting of 7 shares of stock A (purchased for $70 per share) and 4 shares of stock B (purchased for $100 per share). She assumes the expected rates of returns after 1 year will be 0.02 for stock A and 0.15 for stock B, with variances of 0.04 and 0.18, respectively.
The expected rate of return after 1 year for Maria's portfolio is ________. (Hint: For best results, retain at least four decimal places for any intermediate calculations.)

Respuesta :

ajeigbeibraheem

Answer:

0.0784

Step-by-step explanation:

From the information given:

The weight invested in stock A  [tex]w_x = \dfrac{7 \times 70}{7 \times 70 + 4 \times 100 }[/tex]

[tex]w_x = \dfrac{490}{490+ 400 }[/tex]

[tex]w_x = \dfrac{490}{890 }[/tex]

[tex]w_x = 0.55056[/tex]

The weight invested in stock B [tex]w_y = \dfrac{4 \times 100}{7 * 70 + 4 \times 100}[/tex]

[tex]w_y = \dfrac{400}{890}[/tex]

[tex]w_y =0.44944[/tex]

Thus, expected rate of return

= [tex]w_x \times (E) (x) + w_y \times E(Y)[/tex]

= 0.55056(0.02) + 0.44944(0.15)

= 0.0110112 + 0.067416

= 0.0784272

[tex]\simeq[/tex] 0.0784

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