Question

Your retirement portfolio comprises 100 shares of the Standard​ & Poor's 500 fund​ (SPY) and 100 shares of iShares Barclays Aggregate Bond Fund​ (AGG). The price of SPY is $ 112 and that of AGG is $ 100 . If you expect the return on SPY to be 8 ​% in the next year and the return on AGG to be 3 ​%, what is the expected return for your retirement​ portfolio?

Answer 1

Answer:

5.64% per annum

Explanation:

  INVESTMENTS          PRICE     VALUE($)       WEIGHTS

100 shares of SPY         $112          11200        11200/21200  =  0.53            

100 shares of AGG        $100        10000      10000/21200 =  0.47              

          Total Investment                 21200

Return of a portfolio is the weighted average return of individual securities in a portfolio. It is expressed and calculated using following formula,

$R_{p} = R_{a} *\ W_{a} \ +\ R_{b} *\ W_{b}$

$R_{p}$ = .08 × 0.53 + .03 × 0.47

$R_{p}$ = .05636 or 5.64% p.a

Hence expected return for investment would be 5.64%

Expected return of a portfolio represents anticipated rate of return on similar stocks. Expected rate of return is the probable rate of return and is thus usually determined using the probability.