a) The stock market of country A has an expected return of 5 percent, and standard deviation of expected return of 8 percent. The stock market of country B has an expected return of 15 percent and standard deviation of expected return of 10 percent. Find the expected return of a portfolio with half invested in A and half invested in B. (b) The stock market of country A has an expected return of 8 percent, and standard deviation of expected return of 5 percent. The stock market of country B has an expected return of 16 percent and standard deviation of expected return of 10 percent. Assume that the correlation of expected return between A and B is negative 1. Calculate the standard deviation of expected return of a portfolio with half invested in A and half invested in B.
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.
a) The stock market of country A has an expected return of 5 percent, and standard deviation of expected return of 8 percent. The stock market of country B has an expected return of 15 percent and standard deviation of expected return of 10 percent.
Find the expected return of a portfolio with half invested in A and half invested in B.
(b) The stock market of country A has an expected return of 8 percent, and standard deviation of expected return of 5 percent. The stock market of country B has an expected return of 16 percent and standard deviation of expected return of 10 percent.
Assume that the correlation of expected return between A and B is negative 1.
Calculate the standard deviation of expected return of a portfolio with half invested in A and half invested in B.
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