Stock A has a return variance (that is σ2) of 0.02. The market portfolio has a return variance of 0.03. The covariance between stock A’s return and market portfolio’s return is 0.01. Stock A has an expected return of 0.09, while the market has an expected return of 0.12. What is the expected return and standard deviation of a portfolio that is 65% invested in A and 35% invested in the market portfolio? a. ER = 10.1%, σ = 12.9% b. ER = 10.8%, σ = 16.7% c. ER = 10.1%, σ = 16.7% d. ER = 9.0%, σ = 12.9% e. ER = 8.5%, σ = 10.1%
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.
Stock A has a return variance (that is σ2) of 0.02. The market portfolio has a return variance of 0.03. The covariance between stock A’s return and market portfolio’s return is 0.01. Stock A has an expected return of 0.09, while the market has an expected return of 0.12. What is the expected return and standard deviation of a portfolio that is 65% invested in A and 35% invested in the market portfolio?
| a. |
ER = 10.1%, σ = 12.9% |
|
| b. |
ER = 10.8%, σ = 16.7% |
|
| c. |
ER = 10.1%, σ = 16.7% |
|
| d. |
ER = 9.0%, σ = 12.9% |
|
| e. |
ER = 8.5%, σ = 10.1% |
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