A stock portfolio consists of four stocks. Stock A represents 20% of the portfolio and has a return of 6%. Stock B represents 30% of the portfolio and has a return of 8%. Stock C represents 20% of the portfolio and has a return of 4%. Stock D represents the remaining 30% of the portfolio and has a negative-return of 5%. What is the average return of the portfolio?

Stock A: 20% of portfolio, return = 6%

Stock B: 30% of portfolio, return = 8%

Stock C: 20% of portfolio, return = 4%

Stock D: 30% of portfolio, return = -5%

The weighted average formula:

$$\text{Average Return} =(wA×rA)+(wB×rB)+(wC×rC)+(wD×rD)$$​

where:

$$wA, \ ,wB, \ wC, \ wD \text{ are the weights (percentages) of stocks A, B, C and D respectively.}$$​​

Solution:

Calculating the weighted return for each stock:

Stock A:  $0.20\times 6=1.2\%$

Stock B: $0.30\times 8=2.4\%$

Stock C: $0.20\times 4=0.8\%$

Stock D: $0.30\times (-5)=-1.5\%$

Thus, the average return of the portfolio:

Thus, the average return of the portfolio is 2.9%

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