A:

To calculate the expected return of a portfolio, an investor needs to add up the weighted averages of each of the investor's securities' expected returns. The equation for the expected return of a portfolio with three securities is as follows:

Expected return = (weight of security A) x (expected return of security A) + (weight of security B) x (expected return of security B) + (weight of security C) x (expected return of security C)

To calculate the expected return of an investor's portfolio, the investor needs to know the expected return of each of the securities in his portfolio as well as the overall weight of each security in the portfolio.

An investor bases the estimates of the expected return of a security on the assumption that what has been proven true in the past will continue to be proven true in the future. The investor does not use a structural view on the market to calculate the expected return. He finds the weight of each security in the portfolio by taking the value of each of the securities and dividing it by the total value of the security.

Once the expected return of each security is known and the weight of each security has been calculated, an investor simply multiplies the expected return of each security by the weight of the same security, and adds up the product of each security.

Since the market is volatile and unpredictable, calculating the expected return of a security is more guesswork than definite, and it could cause inaccuracy in the calculated expected return of a portfolio.

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