Georgia Assessments for the Certification of Educators GACE Practice Test

The stocks in an investor's portfolio had an average return of 8.8% and the bonds had an average return of 5.2%. What is the average overall return on the portfolio?

1. 14%

2. 5.6%

3. 7%

4. Cannot be determined

The correct answer is: 5.6%

To determine the average overall return on the portfolio, it is essential to analyze the components contributing to the overall return, specifically the stocks and bonds. However, the average return on the total portfolio is contingent upon the proportion of the total investment allocated to stocks versus bonds. The provided average returns—8.8% for stocks and 5.2% for bonds—are only a part of the equation. To accurately calculate the average overall return, each component's weight in the portfolio must be known. For instance, if a large proportion of the investment is in stocks, the overall return will lean toward the higher average return from stocks. Conversely, if most of the investment is in bonds, the overall return will reflect that lower average return. Without knowing the distribution of investments between stocks and bonds, one cannot definitively calculate the average return for the entire portfolio. Therefore, lack of information regarding the respective investment amounts in stocks and bonds justifies the conclusion that the average overall return cannot be determined.