Portfolio Annual Expected Return Calculation

What is the calculation to determine the annual expected return for a portfolio of stocks with different expected returns? The calculation to determine the annual expected return for a portfolio of stocks with different expected returns involves calculating the weighted average return based on the amounts invested in each stock. This allows investors to gauge the overall performance of their portfolio.

Weighted Average Return Calculation

Weighted average return = (amount invested in X / total amount invested) * return X + (amount invested in Y / total amount invested) * return Y + (amount invested in Z / total amount invested) * return Z

To calculate the weighted average return, you need to determine the proportion of each stock's investment amount relative to the total investment. This proportion is then multiplied by the respective stock's expected return and summed across all stocks in the portfolio. The resulting value gives the portfolio's annual expected return.

Example:

Assume you have invested $200 in stock X, $300 in stock Y, and $500 in stock Z. The annual expected returns for stock X, Y, and Z are 9%, 2.6%, and -4.6% respectively. Using the formula above:

Weighted average return = (200 / 1000) * 0.09 + (300 / 1000) * 0.026 + (500 / 1000) * (-0.046)

Weighted average return = 0.018 + 0.0078 - 0.023

Weighted average return = 0.0028

Therefore, the portfolio's annual expected return would be 0.0028, or 0.28% when rounded to three decimal places.

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