A person invests the following sums of money in common stocks having
expected returns as follows:

Security    Amt.invested      Expected return

A           $6,000            14%
B           11,000            16
C            9,000            17
D            7,000            13
E            5,000            20
F           13,000            15
G            9,000            18

a.  What is the expected return (percentage) on this portfolio?
b.  What would be the expected return if this person quadrupled their
investment in E while leaving everything else the same?


It is currently 5:15pm on Wed.Oct.1,2003.  A correct answer within the
hour would be greatly appreciated.  Thank You

a.  $6,000/$60,000*14% + $11,000/$60,000*16% + $9,000/$60,000*17% +
$7,000/$60,000*13% + $5,000/$60,000*20% + $13,000/$60,000*15% +
$9,000/$60,000*18% = 16.02% expected return.

b.  $6,000/$75,000*14% + $11,000/$75,000*16% + $9,000/$75,000*17% +
$7,000/$75,000*13% + 4*$5,000/$75,000*20% + $13,000/$75,000*15% +
$9,000/$75,000*18% = 16.81% expected return.

This result makes sense because we increased the investment in E,
which had a higher than average return, thereby increasing the
portfolio's overall return.

The expected return of a portfolio is calculated by the quantity
invested in the asset divided by the total amount invested in all
assets multiplied by the rate of return of each asset.

Source: "Principles of Corporate Finance" Fourth Edition, Brealey &
Myers, McGraw-Hill Inc., 1991, page 190

Sincerely,

Wonko

Very Good