Michael trades T-bills with the annual rate of return equal to 2% and TD stock. The expected rate of return and standard deviation of the rate of return of TD stock are equal to 12% and 25%, respectively . The coefficient of risk aversion of Michael is 2. What is a standard deviation of his optimal portfolio? a. 40% b. 20% c. 25% d. 10% e. 15%
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.
Michael trades T-bills with the annual
a. 40%
b. 20%
c. 25%
d. 10%
e. 15%
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