Hyacinth Macaw invests 68% of her funds in stock I and the balance in stock J. The standard deviation of returns on I is 13%, and on J it is 20%. (Use decimals, not percents, in your calculations.) Calculate the variance of portfolio returns, assuming the correlation between the returns is 1. (Do not round intermediate calculations. Round your answer to 4 decimal places.) Calculate the variance of portfolio returns, assuming the correlation is 0.5. (Do not round intermediate calculations. Round your answer to 4 decimal places.) Calculate the variance of portfolio returns, assuming the correlation is 0. (Do not round intermediate calculations. Round your answer to 4 decimal places.)
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.
Hyacinth Macaw invests 68% of her funds in stock I and the balance in stock J. The standard deviation of returns on I is 13%, and on J it is 20%. (Use decimals, not percents, in your calculations.)
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- Calculate the variance of portfolio returns, assuming the correlation between the returns is 1. (Do not round intermediate calculations. Round your answer to 4 decimal places.)
- Calculate the variance of portfolio returns, assuming the correlation is 0.5. (Do not round intermediate calculations. Round your answer to 4 decimal places.)
- Calculate the variance of portfolio returns, assuming the correlation is 0. (Do not round intermediate calculations. Round your answer to 4 decimal places.)
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