Assume that the average variance of return for an individual security is 50 and that the average covariance is 10. A) What is the expected variance of an equally weighted portfolio of 5, 10, 20, 50 and 100 securities. B) How many securities need to be held before the risk of a portfolio is only 10% more than the minimum?
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.
Assume that the average variance of return for an individual security is 50 and that the average covariance is 10.
A) What is the expected variance of an equally weighted portfolio of 5, 10, 20, 50 and 100 securities.
B) How many securities need to be held before the risk of a portfolio is only 10% more than the minimum?
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
