Here are the percentage returns on two stocks. Month Digital Cheese Executive Fruit January 13 % 7 % February –4 2 March 7 5 April 9 15 May –5 1 June 5 7 July –3 –7 August –9 –5 a-1. Calculate the monthly variance and standard deviation of each stock. (Do not round intermediate calculations. Round your answers to 1 decimal places.) a-2. Which stock is the riskier if held on its own? b. Now calculate the variance and standard deviation of the returns on a portfolio that invests an equal amount each month in the two stocks. (Do not round intermediate calculations. Round your answers to 1 decimal places.) c. Is the variance more or less than half way between the variance of the two individual stocks?
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 percentage returns on two stocks.
| Month | Digital Cheese | Executive Fruit | |||||
| January | 13 | % | 7 | % | |||
| February | –4 | 2 | |||||
| March | 7 | 5 | |||||
| April | 9 | 15 | |||||
| May | –5 | 1 | |||||
| June | 5 | 7 | |||||
| July | –3 | –7 | |||||
| August | –9 | –5 | |||||
a-1. Calculate the monthly variance and standard deviation of each stock. (Do not round intermediate calculations. Round your answers to 1 decimal places.)
a-2. Which stock is the riskier if held on its own?
b. Now calculate the variance and standard deviation of the returns on a portfolio that invests an equal amount each month in the two stocks. (Do not round intermediate calculations. Round your answers to 1 decimal places.)
c. Is the variance more or less than half way between the variance of the two individual stocks?
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