ariance of Bobsled Inc. is 2.5 and the variance of Luge Inc. is 1.6, in a market with a variance of 0.82 and an expected return of 6%. The covariance of Bobsled with the market is 0.984. The covariance of Bobsled with Luge is 0.4 and the correlation coefficient between Bobsled and Luge is 0.2. The risk-free rate (Rf) is 4%. Bobsled Inc’s stock price closes a $65 on December 2, 2021 and at $68 on December 3, 2021. Use CAPM [E(Ri) = Rf + β E(Rm-Rf)]. １. In a portfolio with 30% Bobsled and 70% Luge, what return on Luge would you require to get the same return as the market?
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.
The variance of Bobsled Inc. is 2.5 and the variance of Luge Inc. is 1.6, in a market with a variance of 0.82 and an expected return of 6%. The covariance of Bobsled with the market is 0.984. The covariance of Bobsled with Luge is 0.4 and the correlation coefficient between Bobsled and Luge is 0.2. The risk-free rate (Rf) is 4%. Bobsled Inc’s stock price closes a $65 on December 2, 2021 and at $68 on December 3, 2021. Use
１.
In a portfolio with 30% Bobsled and 70% Luge, what return on Luge would you require to get the same return as the market?
２.What is the variance of portfolio in １) above?
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