Assuming risk free rate to be 2% p.a while market return is expected to be 8% return with a Standard Deviation of 10%, answer the following question using Markowitz Model of lending and borrowing at risk free rate a) AIG can take a maximum portfolio risk of 5%. How much return can they expect with this risk appetite from a portfolio comprising of risky stocks and Risk free asset. Show the risk return combination for the fund with the weights
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.
Assuming risk free rate to be 2% p.a while market return is expected to be 8% return with a Standard Deviation of 10%, answer the following question using Markowitz Model of lending and borrowing at risk free rate
a) AIG can take a maximum portfolio risk of 5%. How much return can they expect with this risk appetite from a portfolio comprising of risky stocks and Risk free asset. Show the risk return combination for the fund with the weights
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