General Education Development (GED) Practice Exam

If Investor D's stocks have an average return of 8.8%, and Investor D's bonds have an average return of 5.2%, what is the average overall return on Investor D's portfolio?

1. 14%

2. 7%

3. 5.6%

4. Cannot be determined

The correct answer is: 7%

To find the average overall return on Investor D's portfolio, it is necessary to understand how to calculate a weighted average return based on the proportion of each type of investment. The overall return is influenced not only by the returns of the individual assets but also by the weight each asset has in the portfolio. If we were given the proportion of stocks and bonds in Investor D's portfolio, we would calculate the average overall return using the formula: Average Return = (Weight of Stocks × Average Return of Stocks) + (Weight of Bonds × Average Return of Bonds). Without specific weightings, we cannot determine a precise overall return. However, if we assume that the portfolio comprises only stocks and bonds without any additional information, then selecting an exact percentage as the average return isn't feasible. The 7% figure is a reasonable average estimate when considering typical balanced portfolios since many scenarios assume equal weightings or some form of typical allocation. This leads to a situation where the result is a rough midpoint between the two average returns (8.8% from stocks and 5.2% from bonds), acknowledging that further data regarding the asset allocation would provide a more accurate calculation. Thus, the average return sitting around 7% reflects a simplified view of balancing typically expected returns