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Using the following information, please calculate the return of an international portfolio. Assume that a portfolio is 45% invested in U.S. stock and 55% in Chinese stock (a = 0.45). Annualized expected returns are 5% and 12% for the US and China stocks, respectively. σUSA = 18.5%; σCHINA = 22.3%; rUSA,CHINA= 0.35 (Correlation)

Respuesta :

The return of an international portfolio, using the provided information, is 8.85%.

The return of an international portfolio is calculated using the following formulae:

rp = a rUS + ( 1 - a ) rrw

where

  • rp = portfolio expected return
  • rUS = expected U.S. market return
  • rrw = expected return for the “rest of the world”
  • a = percent invested in US assets

Using the data provided, this will be calculated as follows:

rp = 0.45 (0.05) + (1 - 0.45) 0.12

rp = 0.0225 + 0.066

rp = 0.0885 or 8.85%

Hence, the return of an international portfolio is 8.85%.

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