Weighted return of a two-asset portfolio

Question

A portfolio holds 25\% of its capital in a stock that returned 12\% and 75\% in a bond that returned 4\%. Solve in your head. What is the portfolio's return? Aim: under 10 seconds.

Accepted Answer

Portfolio return is the capital-weighted average of the holdings' returns. The stock carries weight 	frac14, so the blend sits 	frac14 of the way from the bond's 4\% up toward the stock's 12\%: 4\% + \frac{1}{4}(12\% - 4\%) = 4\% + \frac{1}{4}(8\%) = 4\% + 2\% = 6\%. Direct check: 0.25 \cdot 12 + 0.75 \cdot 4 = 3 + 3 = 6\%. Takeaway. A portfolio return is just a weighted average of its parts, pulled toward the largest position. Anchor at the heavier holding's return and step along the gap by the smaller holding's weight.

Weighted return of a two-asset portfolio

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