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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.
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- Suppose an investment is equally likely to have a 37.9% return or a -20% return. The total volatility of returns is closest to: a. 28.95% b. 8.38% c. 20.47% d. 40.94%An investment has probabilities 0.15, 0.34, 0.44, 0.67, 0.2 and 0.15 of giving returns equal to 50%, 39%, -4%, 20%, -25%, and 42%. What are the expected returns and the standard deviations of returns?If a portfolio had a return of 11%, the risk-free asset return was 6%, and the standard deviation of the portfolio's excess returns was 25%, the risk premium would be A. 21%. B. 35%. C. 14%. D. 5%. E. 6%.
- The historical returns on a portfolio had an average return of 19% and a standard deviation of 12%. Assume returns on the portfolio follow a bell-shaped distribution. Use the empirical rule to answer the following questions. a. What percentage of returns were between 7 percent and 31 percent? Percentage of returns b. What percentage of returns were greater than 31 percent? Percentage of returns % % Percentage of returns c. What percentage of returns were below -5 percent? %If a portfolio had a return of 12%, the risk-free asset return was 4%, and the standard deviation of the portfolio's excess returns was 25%, the Sharpe measure would be A. 0.25. B. 0.04. C. 0.12. D. 0.16. E. 0.32.In the APT model, what is the nonsystematic standard deviation of an equally-weighted portfolio that has an average value of σ(ei) equal to 20% and 40 securities? A. 0.5% B. 3.16% C. 3.54% D. 12.5% E. 625%
- Consider the following two assets: Asset Expected return Standard deviation of returns 1 18% 30% 2 8% 10% The returns on the two assets are perfectly negatively correlated (i.e. coefficient of -1). Calculate the proportions of assets 1 and 2 that generate a portfolio with a standard deviation of zero. What is the expected return of that portfolio?Portfolios A and B are both well-diversified. The risk-free rate is 8%. The return for the market is 10%. Portfolio A has an expected return of 15% and beta of 1.1. Portfolio B has an expected return of 9% and beta of 0.20. Portfolio A's variance is 9%, whilst Portfolio B's variance is 5.5%. Calculate for Portfolio A and Portfolio B the following: 1. Sharpe's Measure, 2. Treynor's Measure, 3. Jensen's Measure. Which is the better portfolio according to each measure?assume that the following data available for the portfolio, calculate the expected return, variance and standard deviation of the portfolio given stock A account for 45% an stock B account for 55% of you portfolio? A B Expexted return 12.5% 18.5% standard deviation of return 15% 20% correlation of cofficient(p) 0.4
- Assume that the following data available for the portfolio, calculate the expected return,variance and standard deviation of the portfolio given stock A accounts for 45% and stockB accounts for 55% of your portfolio? A BExpected return 12.5% 18.5%Standard Deviation of return 15% 20%Correlation of coefficient (p) 0An asset has an average return of 11.03 percent and a standard deviation of 21.10 percent. What range of returns should you expect to see with a 95 percent probability? -10.07% to 32.13% -31.17% to 53.23% O-52.27% to 74.33 % O-10.07% to 11.99%What is the total risk of portfolio as per Sharpe's Single Index Model if standard deviation of market is 20 % , beta of portfolio is 1.27, unsystematic risk in variance term of the portfolio is 107 a. 752.16 b. 400 c. 107 d. 626