-10 We have the following information on a portfolio consisting of Stocks A, B, and C: A B C Expectd annual return 25% 20% 15% Standard Deviation of Return 35% 30% 25% Price per share 100 85 75 # shares
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
2-10
We have the following information on a portfolio consisting of Stocks A, B, and C:
A B C
Expectd annual return 25% 20% 15%
Standard Deviation of Return 35% 30% 25%
Price per share 100 85 75
# shares 100,000 150,000 200,000
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correlation coefficient (A,B) 0.5
correlation coefficient (A,C) 0.2
correlation coefficient (B,C) 0.8
number of days per year 365
What is the portfolio weight of A,B, and C shares in the portfolio?
Include formula, variables, values, and market values of A, B, and C.
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