Listed below are the annual rates of return earned on Stock X, Stock Y and Stock Z over the past 6 years. Year Stock X Stock Y Stock Z 2014 20% 16% 0% 2015 15% 17% -2% 2016 -10% 15% 1% 2017 30% 11% 0% 2018 25% 5% 1% 2019 14% -25% 1% As risk-adverse investor, what portfolio would you choose? Here are the options: Stock X only, Stock Y only, Stock Z only, a 50/50 split portfolio made of X & Y, or a 90/10 split portfolio made of X & Y. Show your calculations and support your choice.
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.
Listed below are the annual
and Stock Z over the past 6 years.
Year Stock X Stock Y Stock Z
2014 20% 16% 0%
2015 15% 17% -2%
2016 -10% 15% 1%
2017 30% 11% 0%
2018 25% 5% 1%
2019 14% -25% 1%
As risk-adverse investor, what portfolio would you choose? Here are the options:
Stock X only, Stock Y only, Stock Z only, a 50/50 split portfolio made of X & Y,
or a 90/10 split portfolio made of X & Y. Show your calculations and support your
choice.
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