Stock X, Stock Y, and the market have had the following returns over the past four years. Year 1 234 Market 10% 9 14 5 8.75% 8.23% 11.58% 13.62% O 15.01% X 12% 6 10 Y 8% 3 12 -2 The risk-free rate is 5 percent. The market risk premium is 8 percent. What is the required rate of return for a portfolio which consists of $15,000 invested in Stock X and $10,000 invested in Stock Y?
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.
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