What is the expected return of a portfolio consisting of 80% stocks and 20% T-bills?

To determine the expected return of a portfolio made up of 80% stocks and 20% T-bills, it's essential to understand how to calculate a weighted average return based on the proportions of the assets in the portfolio.

In this scenario, let's assume the expected return on stocks is 10% and the return on T-bills (a risk-free asset) is 4%. The expected return of the portfolio can be calculated as follows:

1. Multiply the return of each asset class by its corresponding weight in the portfolio:

   • Stocks: 80% (or 0.8) * 10% (or 0.10) = 0.08 or 8%
   • T-bills: 20% (or 0.2) * 4% (or 0.04) = 0.008 or 0.8%

2. Add the results of the two calculations:

   • 8% (from stocks) + 0.8% (from T-bills) = 8.8%

Thus, the expected return of the portfolio, comprising 80% stocks and 20% T-bills, is 8.8%. This approach allows for a clear