Stocks offer an expected rate of return of 18%, with a standard deviation of 22%. Gold offers an expected return of 10% with a standard deviation of 30%.a. In light of the apparent inferiority of gold with respect to both mean return and volatility, would anyone hold gold? If so, demonstrate graphically why one would do so.b. Given the data above, reanswer (a) with the additional assumption that the correlation coefficient between gold and stocks equals 1. Draw a graph illustrating why one would or would not hold gold in one’s portfolio. c. Could the set of assumptions in part (b) for expected returns, standard deviations, and correlation represent an equilibrium for the security market?
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 offer an expected
a. In light of the apparent inferiority of gold with respect to both mean return and volatility, would anyone hold gold? If so, demonstrate graphically why one would do so.
b. Given the data above, reanswer (a) with the additional assumption that the correlation coefficient between gold and stocks equals 1. Draw a graph illustrating why one would or
would not hold gold in one’s portfolio.
c. Could the set of assumptions in part (b) for expected returns, standard deviations, and correlation represent an equilibrium for the security market?
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