Table 135

Expected Return on an Equally Weighted Portfolio of Stock L and Stock U

This is the same portfolio expected return we calculated previously.

This method of calculating the expected return on a portfolio works no matter how many assets there are in the portfolio. Suppose we had n assets in our portfolio, where n is any number. If we let xi stand for the percentage of our money in Asset i, then the expected return would be:

This says that the expected return on a portfolio is a straightforward combination of the expected returns on the assets in that portfolio. This seems somewhat obvious, but, as we will examine next, the obvious approach is not always the right one.

Portfolio Expected Return

Suppose we have the following projections on three stocks:

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