Georgia Assessments for the Certification of Educators GACE Practice Test

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

1. 5.6%

2. 7%

3. 14%

4. Cannot be determined

The correct answer is: 7%

To calculate the average overall return on Investor D's portfolio, we need to consider the weighted contributions of both stocks and bonds to the portfolio. The overall return is not merely an average of the returns; it depends on the proportion of the total portfolio that is invested in each asset class. If the portfolio consists of a specific percentage in stocks and a specific percentage in bonds, then the overall return would be calculated by taking the weighted average of the returns from both investments. For instance, if 60% of the portfolio is in stocks and 40% is in bonds, the calculation would include multiplying each return by its respective weight. Given the returns for stocks and bonds, the average overall return will yield a figure that reflects these contributions. The question does not provide specific allocations between the two asset classes, but the inclusion of an answer choice suggesting a specific numerical return implies that the average can be reasonably estimated. To derive a sensible average, one can consider common allocations, such as 50/50. In this scenario, the calculated average return from the stocks (8.8%) and the bonds (5.2%) would yield an average return of around 7%. Therefore, this can be taken as a plausible estimate for the overall return based