Finance problem help

[FFactory0x]

Given the following market values of stocks in your portfolio and their expected rates of return, what is the expected rate of return for your common stock portfolio?
Market Value
Stock ($ Mil.) E(Ri)
Phillips Petroleum $15,000 0.14
Starbucks 17,000 -0.04
International Paper 32,000 0.18
Intel 23,000 0.16
Walgreens 7,000 0.12

 

[radioouman]

42, just like last time.

 

[ggavinmoss]

Uh, can't you just take the sum of the individual returns (weighted by the market values)?

-geoff

 

[FFactory0x]

Originally posted by: radioouman
42, just like last time.

Add up e(Ri) and divide by 5?

 

[ggavinmoss]

Originally posted by: FFactory0x

Originally posted by: radioouman
42, just like last time.

Add up e(Ri) and divide by 5?

That would give you the average return of the assets in the portfolio, not the portfolio return.

You need to weight each return by how much of the portfolio it represents (in terms of market value). An assets that accounts for 50% of the portfolio will affect the portfolio return more than an asset that accounts for a mere 10%...

-geoff

 

[FFactory0x]

Add up all market values which = 94000 then divide each stock mv by 94000???

 

[BigJ]

Originally posted by: ggavinmoss

Originally posted by: FFactory0x

Originally posted by: radioouman
42, just like last time.

Add up e(Ri) and divide by 5?

That would give you the average return of the assets in the portfolio, not the portfolio return.

You need to weight each return by how much of the portfolio it represents (in terms of market value). An assets that accounts for 50% of the portfolio will affect the portfolio return more than an asset that accounts for a mere 10%...

-geoff

I don't really have a clue about finance, but it seems like it's just what you're saying, an extension of an ordinary weighted average problem.

 

[ggavinmoss]

Originally posted by: FFactory0x
Add up all market values which = 94000 then divide each stock mv by 94000???

Well... what would that get you? That would get you the weight of each asset in the portfolio. Multiply the weight by the asset return and you'll have the weighted return for the asset in the portfolio. Add those up and you'll have the portfolio return.

-geoff

 

[ggavinmoss]

Originally posted by: BigJ

Originally posted by: ggavinmoss

Originally posted by: FFactory0x

Originally posted by: radioouman
42, just like last time.

Add up e(Ri) and divide by 5?

That would give you the average return of the assets in the portfolio, not the portfolio return.

You need to weight each return by how much of the portfolio it represents (in terms of market value). An assets that accounts for 50% of the portfolio will affect the portfolio return more than an asset that accounts for a mere 10%...

-geoff

I don't really have a clue about finance, but it seems like it's just what you're saying, an ordinary weighted average problem.

That's all it is.

-geoff

 

[FFactory0x]

Well the Answer is


0.124468

Im not getting this

 

[ggavinmoss]

Originally posted by: FFactory0x
Well the Answer is


0.124468

Im not getting this

http://pics.bbzzdd.com/users/ggavinmoss/return.jpg

 

[BigJ]

Originally posted by: FFactory0x
Well the Answer is


0.124468

Im not getting this

Here's the simplest way to do it.

If a % is positive, that means it's a positive return. So you'd have 1 + x (where X is the decimal) times your investment. So in the case of Philips, you'd have 1.14, equalling a total of $17,100.

Do this for each of the stocks, add 'em all up, and you'll get $105,700. Divide that by $94,000 (your total initial investment), and you'll get 1.124468. Your return was 12.4468%. Or .124468.