Suppose you invest 60% of your portfolio in exxon mobil and 40% in coca cola. The expected dollar return on your exxon mobil stock is 10% and on coca cola is 15%. The standard deviation of their annualized daily returns are 18.2% and 27.3%, respectively. Assuming a correlation coefficient of 1.0 Required: The portfolio expected return The portfolio variance The portfolio standard deviation
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.
Suppose you invest 60% of your portfolio in exxon mobil and 40% in coca cola. The expected dollar return on your exxon mobil stock is 10% and on coca cola is 15%. The standard deviation of their annualized daily returns are 18.2% and 27.3%, respectively. Assuming a correlation coefficient of 1.0
Required:
- The portfolio expected return
- The portfolio variance
- The portfolio standard deviation
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
