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.
Here are the returns on two stocks.
| Digital Cheese | Executive Fruit | ||||||
| January | +17 | +6 | |||||
| February | -4 | +1 | |||||
| March | +6 | +5 | |||||
| April | +8 | +15 | |||||
| May | -5 | +2 | |||||
| June | +4 | +4 | |||||
| July | -3 | -4 | |||||
| August | -9 | -3 | |||||
a. Calculate the variance and standard deviation of each stock. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Digital Cheese Return Executive Fruit Return
Variance % %
Standard Deviation % %
b. Which stock is riskier if held on its own?
c. Now calculate the returns in each month of a portfolio that invests an equal amount each month in the two stocks. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)
d. Is the variance more or less than halfway between the variance of the two individual stocks?
Portfolio Return
Jan.
Feb.
March
April
May
June
July
August
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