Stocks A and B have the following historical returns: Year Stock A return Stock B return 2004 (24.25%) 5.5% 2005 18.5% 26.73% 2006 38.67% 48.25% 2007 14.33% (4.5%) 2008 39.13% 43.86% Calculate the standard deviation of returns for each stock and for the 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 the following historical returns:
|
Year |
Stock A return |
Stock B return |
|
2004 |
(24.25%) |
5.5% |
|
2005 |
18.5% |
26.73% |
|
2006 |
38.67% |
48.25% |
|
2007 |
14.33% |
(4.5%) |
|
2008 |
39.13% |
43.86% |
- Calculate the standard deviation of returns for each stock and for the portfolio.
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