Shares in SergeantPepper will earn a return of 6.00% during a bull market, and 6.10% during a bear market. Shares in AbbeyRoad will earn a return of 5.20% during a bull market, and 1.30% during a bear market. Over the next year, there is a 74% chance of a bull market, otherwise it will be a bear market. What is the covariance of the two security returns?
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.
Shares in SergeantPepper will earn a return of 6.00% during a bull market, and 6.10% during a bear market. Shares in AbbeyRoad will earn a return of 5.20% during a bull market, and 1.30% during a bear market. Over the next year, there is a 74% chance of a bull market, otherwise it will be a bear market. What is the covariance of the two security returns?
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- covariance of the two security returns
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