Mr. A has a total fund of 40,000 INR. A decided to invest ₹ 25,000 in a portfolio with an expected return of 7.5 percent and invest the rest in a risk-free asset that he expects to return 3.6 percent. What rate of return is he expecting on his overall portfolio?
Question
Mr. A has a total fund of 40,000 INR. A decided to invest ₹ 25,000 in a portfolio with an expected return of 7.5 percent and invest the rest in a risk-free asset that he expects to return 3.6 percent. What rate of return is he expecting on his overall portfolio?
Solution
To calculate the expected return on Mr. A's overall portfolio, we need to follow these steps:
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First, we need to find out how much Mr. A invested in the risk-free asset. We know that he has a total fund of 40,000 INR and he invested 25,000 INR in a portfolio. So, the amount invested in the risk-free asset is 40,000 - 25,000 = 15,000 INR.
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Next, we calculate the expected return from each investment. For the portfolio, it's 25,000 * 7.5/100 = 1,875 INR. For the risk-free asset, it's 15,000 * 3.6/100 = 540 INR.
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Now, we add these two amounts to get the total expected return from the overall portfolio, which is 1,875 + 540 = 2,415 INR.
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Finally, we calculate the expected rate of return on the overall portfolio. This is done by dividing the total expected return by the total investment and then multiplying by 100 to get the percentage. So, the expected rate of return is (2,415 / 40,000) * 100 = 6.0375 percent.
So, Mr. A is expecting a rate of return of approximately 6.04 percent on his overall portfolio.
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