Rate of return on a portfolio: Difference between revisions

The rate of return on a portfolio is "a weighted average of the rates of return on various assets-" i.e an average of the average returns of a portfolio "-with the weights being equal to the fractions of one's wealth held in these assets" in other word taking into account what portion of a portfolio each individual return represents. For example let the: rate of return on a mining stock also called r_m equal 10% rate of return on a child care centre also called r_c equal 8% rate of return on a fishing company also called r_f equal 12% Now assume for weighting, that 40% of your portfolio is in the mining stock (weighting for this stock also called A_m) and 40% is in the child care centre (weighting for this stock also called A_c)and the remaining 20% is in the fishing company (weighting for this stock also called A_f). To determine the rate of return of this portfolio we multiply the weighting of each asset by its rate of return and simply add these figures together. So: for the mining stock, its weighting is 40% and its rate of return is 10% so it equals 40% x 10% = .04 = 4% for the child care centre, its weighting is 40% and its rate of return is 8% so it equals 40% x 8% = .032 = 3.2% for the fishing company, its weighting is 20% and its rate of return is 12% so it equals 20% x 12% = .024 = 2.4% Now we add these percentages and we get 4% + 3.2% + 2.4% = 9.6% therefore the rate of return on the portfolio = 9.6% Mathematically this whole process may be written as r_p = A_mr_m + A_cr_c + A_fr_f where r_p equals the rate of return on the portfolio.