You own three stocks: 600 shares of apple computer, 10,000 shares of cisco systems, and 5,000 shares of colgate-palmolive. the current share prices and expected returns of apple, cisco, and colgate-palmolive are, respectively, $ 515, $ 20, $ 106 and 12 %, 10 %, 8 %. (a) what are the portfolio weights of the three stocks in your portfolio? (b) what is the expected return of your portfolio? (c) suppose the price of apple stock goes up by $ 22, cisco rises by $ 6, and colgate-palmolive falls by $ 10. what are the new portfolio weights? (d) assuming the stocks' expected returns remain the same, what is the expected return of the portfolio at the new prices?

Stock   Weights  

Apple  30%

Cisco  19%

Colgate  51%

TOTAL  100%

Stock   Expected Ret. Portfolio  

Apple      3,6%

Cisco      1,9%

Colgate  4,1%

Portfolio9,6%

Stock   Weights  

Apple  30%

Cisco  24%

Colgate  45%

TOTAL  100%

Stock   Expected Ret. Portfolio  

Apple  3,6%

Cisco  2,4%

Colgate  3,6%

TOTAL  9,7%

Explanation:

To calculate the portfolio weights it's necessary to know the total value by Stock of the portfolio, with the information available about share prices and sharea outstanding is possible to find the total value of the portfolio and the weights of each share.

Stock   Value   Weights  

Apple   $309,000  30%

Cisco   $200,000  19%

Colgate   $530,000  51%

TOTAL   $1,039,000  100%

The Expected Return of the portfolio it's related to the weights of each stock, with the information about the Expected Return and the Weights of each stock it's possible to know the Expected Return of the Portfolio.

Stock   Exp Return   Value   Weights       Exp. Ret. Portfolio  

Apple      12%    309.000  30%  3,6%

Cisco      10%    200.000  19%  1,9%

Colgate    8%     530.000  51%  4,1%

TOTAL              1.039.000  100%9,6%

When the value of each share changes, this impacts the total value of the portfolio and current weights, then changes the Expected Return of the portfolio.

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