Problem: Roger has just been hired as chief portfolio officer of Bear United Capital. As part of this new position, he has been asked to assemble a model portfolio from a set of assets. The assets in the model portfolio include the following:
Weight Expected Return Actual Return
Stock A 0.2 0.05 0.09
Stock B 0.1 0.07 0.04
Stock C 0.25 0.12 0.14
Stock D 0.05 0.02 0.04
Stock E 0.1 0.04 0.01
Stock F 0.3 0.35 -0.02
Using the above assets from the model portfolio and their associated values, calculate the following:
• The rate of return of the portfolio
• The expected rate of return on the portfolio
• Discuss your perception of the two returns and what is driving each in detail
• Which return is a better measure of return on a portfolio, and when should you use each