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.
In reference to the portfolio information presented below, answer the following questions.
|
Portfolio |
Weighting in Stock K |
Weighting in Stock L |
Weighting in Stock M |
Weighting in Stock N |
|
Portfolio 1 |
25% |
25% |
25% |
25% |
|
Portfolio 2 |
30% |
40% |
20% |
10% |
|
Portfolio 3 |
10% |
20% |
40% |
30% |
The betas of the above four stocks, K, L, M, and N are 0.65, 0.9, 1.25, and 1.55, respectively. Calculate the beta for each of the portfolio in the above table given the weights in each asset as presented in the table. Show all work and formula(s) clearly. Specify the type of risk (i.e. systematic or unsystematic) beta is generally used to measure.
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