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 the various assets with the weights being equal to the fractions of the individual's wealth held in these assets" This equates to an average of the average returns on a portfolio taking into account what portion of the portfolio each individual return represents.

Example

• rate of return on a mining stock also called r_m equals 10%
• rate of return on a child care centre also called r_c equals 8%
• rate of return on a fishing company also called r_f equals 12%

Now assume that 40% of the portfolio is in the mining stock (weighting for this stock also called A_m), 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 on this portfolio, multiply the weighting of each asset by its rate of return and add these figures together:

• 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%

Adding these percentages gives 4% + 3.2% + 2.4% = 9.6% therefore the rate of return on this 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.