Stocks A, B and C have a monthly return and variance of: (10%, 0.0036), (15%, 0.0009) and (3%, 0.036) respectively. The coefficient of correlations are: Coef (A,B) 0.7, Coef (B,C) = 0.8, Coef (A,C) = 0.2 m a. Calculate the Covariances (A,B), (A,C) and (C, A) b. Calculate the weights to invest in each stock in order to have a portfolio with minimum variance with a return expected of 12% c. Calculate the return of the portfolio using the weights found in (B) d. Calculate the variance for this portfolio

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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.