If Investor D's portfolio contains 50 percent in stocks with an average return of 8.8 percent and 50 percent in bonds with an average return of 5.2 percent, what is the overall average return?

If Investor D's portfolio contains 50 percent in stocks with an average return of 8.8 percent and 50 percent in bonds with an average return of 5.2 percent, what is the overall average return?

• A. 7%
• B. 6.8%
• C. 7.6%
• D. 8%

Answer: (A)

When a portfolio is equally weighted, the overall return is the simple average of the two asset returns. Half the portfolio earns 8.8%, and half earns 5.2%. So compute 0.5 × 8.8 = 4.4 and 0.5 × 5.2 = 2.6, then add them: 4.4 + 2.6 = 7.0. The overall average return is 7%. If the weights weren’t equal, you’d use a weighted average: w_stock × 8.8% + w_bond × 5.2%, with w_stock + w_bond = 1. The other options would come from different weights or a miscalculation.

When a portfolio is equally weighted, the overall return is the simple average of the two asset returns. Half the portfolio earns 8.8%, and half earns 5.2%. So compute 0.5 × 8.8 = 4.4 and 0.5 × 5.2 = 2.6, then add them: 4.4 + 2.6 = 7.0. The overall average return is 7%.

If the weights weren’t equal, you’d use a weighted average: w_stock × 8.8% + w_bond × 5.2%, with w_stock + w_bond = 1. The other options would come from different weights or a miscalculation.