Harold Rawlings has computed the returns he earned last year from each of the stock he holds in his portfolio. The individual returns and the amount he had invested in each stock at the beginning of the year are shown in the following table:
Stock Return Amount Invested
AT&T 22.5% $5,200
GM 12.3% $5,520
Danka -44.7% $1,200
Suiza Foods 100.0% $ 3.080
A. Compute the return that Harold earned on his portfolio during the year?
B. Harold has decided to keep Danka in his portfolio, even though it has experienced financial difficulties and performed very poorly last year, because he expects a significant turnaround that will generate a 25 percent return next year. Suppose that Harold is correct. Assuming that the returns from the other stocks remain the same as last year, compute the return on the portfolio for next year. (Hint: The portfolio weights for the stocks change based on the returns earned last year, so the values of the stocks at the end of the year should be used to compute the new weights.)