In a particular year, Aggie Mutual Fund earned a return of 15% by making the following investments in the following asset classes: Weight Return Bonds 10 % 6 % Stocks 90 % 16 % The return on a bogey portfolio was 10%, calculated as follows: Weight Return Bonds (Lehman Brothers Index) 50 % 5 % Stocks (S&P 500 Index) 50 % 15 % The contribution of selection within markets to total excess return was A. 3%. B. 5%. C. 4%. D. 1%.
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 a particular year, Aggie Mutual Fund earned a return of 15% by making the following investments in the following asset classes:
| Weight | Return | |||
| Bonds | 10 | % | 6 | % |
| Stocks | 90 | % | 16 | % |
The return on a bogey portfolio was 10%, calculated as follows:
| Weight | Return | |||
| Bonds (Lehman Brothers Index) | 50 | % | 5 | % |
| Stocks (S&P 500 Index) | 50 | % | 15 | % |
The contribution of selection within markets to total excess return was
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