There are two assets and two states of the economy. State of Probability Rate of Return Rate of Return Economy of State of Stock A of Stock B Recession 0.60 -10% 15% Boom 0.40 30 -5 Suppose you have $30,000 total. If you put $9,000 in Stock A and the remainder in Stock B, what will be the expected return and standard deviation on your 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.
There are two assets and two states of the economy.
State of Probability
Economy of State of Stock A of Stock B
Recession 0.60 -10% 15%
Boom 0.40 30 -5
Suppose you have $30,000 total. If you put $9,000 in Stock A and the remainder in Stock B, what will be the expected return and standard deviation on your portfolio?
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