A portfolio consists of $18,200 in Stock M and $30,900 invested in Stock N. The expected return on these stocks is 10.40 percent and 14.30 percent, respectively. What is the expected return on the portfolio?
a.13.58%
b.11.85%
c.12.85%
d.10.86%
e.12.35%

The correct answer is option (C).

Explanation:

According to the scenario, the given data are as follows:

Stock M = $18,200

Expected Return on Stock M = 10.40%

Stock N = $30,900

Expected return on Stock N = 14.30%

So, we can calculate the expected return on portfolio by using the following formula:

Expected return = Respective return (Stock M) × Respective weights (stock M) + Respective return (Stock N) × Respective weights (stock N)

Here, Total investment= ($18,200 + $30,900) = $49,100

So, by putting the value

Expected Return = (18200/49100 × 10.4) + (30900/49100 × 14.30)

= 12.85% (Approx).

Hence, the expected return on the portfolio is 12.85%.

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