Stocks A and B have a correlation coefficient of –0.8. The stocks' expected returns and standard deviations are in the table below. A portfolio consisting of 40% of stock A and 60% of stock B is constructed. Stock Expected Return Standard Deviation A 20% 25% B 15% 19% Refer to Exhibit 6.14. What is the standard deviation of the stock A and B portfolio?
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.
Stocks A and B have a correlation coefficient of –0.8. The stocks' expected returns and standard deviations are in the table below. A portfolio consisting of 40% of stock A and 60% of stock B is constructed.
| Stock | Expected Return | Standard Deviation |
| A | 20% | 25% |
| B | 15% | 19% |
Refer to Exhibit 6.14. What is the standard deviation of the stock A and B portfolio?
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