Based on current dividend yields and expected capital gains, the expected rates or return on portfolios A and B are 12% and 18%, respectively. The beta of A is 0.7 while that of B is 1.6. The T-bill rate is currently 4% while the expected rate of return of the S&P500 Index is 13%. The standard deviation of portfolio A is 14% annually, while that of B is 26%, and that of the index is 15%. If instead you could invest only in bills and one of these porfolios, which would you choose? Use the sharpe ratio to make your desicion.
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.
Based on current dividend yields and expected
If instead you could invest only in bills and one of these porfolios, which would you choose? Use the sharpe ratio to make your desicion.
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 3 images
