A portfolio consists of $18,200 in Stock M and $30,900 invested in Stock N. The expected return on these stocks is 10.40 percent and 14.30 percent, respectively. What is the expected return on the portfolio?

a. 13.58%

b. 11.85%

c. 12.85%

d. 10.86%

e. 12.35%

The correct answer is option (C).

Explanation:

According to the scenario, the given data are as follows:

Stock M = $18,200

Expected Return on Stock M = 10.40%

Stock N = $30,900

Expected return on Stock N = 14.30%

So, we can calculate the expected return on portfolio by using the following formula:

Expected return = Respective return (Stock M) * Respective weights (stock M) + Respective return (Stock N) * Respective weights (stock N)

Here, Total investment = ($18,200 + $30,900) = $49,100

So, by putting the value

Expected Return = (18200/49100 * 10.4) + (30900/49100 * 14.30)

= 12.85% (Approx).

Hence, the expected return on the portfolio is 12.85%.