If You Own a Portfolio with a 14% Expected Return

question 3

Multiple Choice

If you own a portfolio with a 14% expected return, and the risk free rate is 4%, what is the expected return on the total portfolio if you invest 60% in the risky portfolio and the remainder in the risk free asset?

• A) 9%
• B) 10%
• C) 12%
• D) 14%

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Definitions:

Residual Income

Earnings that exceed the minimum required return on investment; it's what remains after all costs and expenses have been deducted.

Return on Investment

A performance measure used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments, calculated as net profit divided by the cost of the investment.

Gross Margin

The difference between revenue and cost of goods sold, divided by revenue, expressed as a percentage.

Average Operating Assets

The average value of a company's assets used in its operating activities over a certain period.