Year Stock A return Stock B return 2004 (24.25%) 5.5% 2005 18.5% 26.73% 2006 38.67% 48.25% 2007 14.33% (4.5%) 2008 39.13% 43.86% Calculate the average rate of return for each stock during the period 2004 through 2008. Assume that someone held a portfolio consisting of 50% of Stock A and 50% of Stock What would the realized rate of return on the portfolio have been in each year from 2004 through 2008? What would the average return on the portfolio have been during that period?
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 A and B have the following historical returns:
|
Year |
Stock A return |
Stock B return |
|
2004 |
(24.25%) |
5.5% |
|
2005 |
18.5% |
26.73% |
|
2006 |
38.67% |
48.25% |
|
2007 |
14.33% |
(4.5%) |
|
2008 |
39.13% |
43.86% |
- Calculate the average
rate of return for each stock during the period 2004 through 2008. Assume that someone held a portfolio consisting of 50% of Stock A and 50% of Stock
What would the realized rate of return on the portfolio have been in each year from 2004 through 2008? What would the average return on the portfolio have been during that period?
Calculate the standard deviation of returns for each stock and for the portfolio.
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