The table below shows standard deviations and correlation coefficients for seven stocks from different countries. Calculate the variance of a portfolio with equal investments in each stock. (Use decimals, not percents, in your calculations. Do not round intermediate calculations. Round your answer to 4 decimal places.) BHP Billiton Siemens Nestlé LVMH Toronto Dominion Bank Samsung BP BHP Billiton 1.00 0.28 0.37 0.40 0.16 0.40 0.14 Siemens 1.00 0.34 0.16 0.14 0.31 –0.12 Nestlé 1.00 0.09 0.10 0.02 0.10 LVMH 1.00 0.33 0.51 –0.07 Toronto Dominion Bank 1.00 0.10 –0.10 Samsung 1.00 –0.09 BP 1.00 Standard deviation (%) 25.00 36.80 47.80 23.30 17.00 37.50 45.40
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.
The table below shows standard deviations and correlation coefficients for seven stocks from different countries. Calculate the variance of a portfolio with equal investments in each stock. (Use decimals, not percents, in your calculations. Do not round intermediate calculations. Round your answer to 4 decimal places.)
| BHP Billiton | Siemens | Nestlé | LVMH | Toronto Dominion Bank | Samsung | BP | ||||||||
| BHP Billiton | 1.00 | 0.28 | 0.37 | 0.40 | 0.16 | 0.40 | 0.14 | |||||||
| Siemens | 1.00 | 0.34 | 0.16 | 0.14 | 0.31 | –0.12 | ||||||||
| Nestlé | 1.00 | 0.09 | 0.10 | 0.02 | 0.10 | |||||||||
| LVMH | 1.00 | 0.33 | 0.51 | –0.07 | ||||||||||
| Toronto Dominion Bank | 1.00 | 0.10 | –0.10 | |||||||||||
| Samsung | 1.00 | –0.09 | ||||||||||||
| BP | 1.00 | |||||||||||||
| Standard deviation (%) | 25.00 | 36.80 | 47.80 | 23.30 | 17.00 | 37.50 | 45.40 | |||||||
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