ABC Investment Ltd has set up a portfolio that comprises Gold shares and Silver shares. The following information relates to these shares. Gold Silver Expected return 17% 12% Standard Deviation of return 15% 5% Correlation of coefficient - 0.5 Required: Determine the expected return of the portfolio if 65% of Gold shares and 35% of Silver shares are combined to form the portfolio Determine the risk of the portfolio by calculating portfolio standard deviation given the same portfolio combination For the past 5 years, the portfolio has the consecutive rate of returns of 12%, 15 %, -14%, 13% and 16%. Calculate the geometric average return of this portfolio for the period
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.
ABC Investment Ltd has set up a portfolio that comprises Gold shares and Silver shares.
The following information relates to these shares.
|
|
Gold |
Silver |
|
Expected return |
17% |
12% |
|
Standard Deviation of return |
15% |
5% |
|
Correlation of coefficient |
- 0.5 |
Required:
Determine the expected return of the portfolio if 65% of Gold shares and 35% of Silver shares are combined to form the portfolio
Determine the risk of the portfolio by calculating portfolio standard deviation given the same portfolio combination
For the past 5 years, the portfolio has the consecutive
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