Romeo's portfolio: Portfolio composition: 80% in stocks, 20% in bonds Investor goal: Romeo is aiming for an 8% return on his investments. Expected returns: Stocks: 10% Bonds: 3% What is the expected rate of return for Romeo’s portfolio, and does it meet his goal of 8% ?
Answer
A
9 point 0 percent; yes, it exceeds his goal.
B
8 point 0 percent; yes, it meets his goal.
C
8 point 6 percent; yes, it exceeds his goal.
D
0 point 6 percent; no, it does not meet his goal.
Explanation
Find the portfolio’s expected return by weighting each investment’s return by its share of the portfolio: (80% × 10%) + (20% × 3%) = 8% + 0.6% = 8.6%. Since 8.6% is greater than Romeo’s 8% goal, his portfolio exceeds it. The correct choice is B, 8.6 percent; yes, it exceeds his goal.
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