You have $8600 to invest. You decide to invest $17,000 in Google and short sell $8400 worth of Yahoo! Google’s expected return is 14% with a volatility of 26% and Yahoo!’s expected return is 12% with a volatility of 26%. The stocks have a correlation of 0.92. What is the expected return and volatility of the 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.
You have $8600 to invest. You decide to invest $17,000 in Google and short sell $8400 worth of Yahoo! Google’s expected return is 14% with a volatility of 26% and Yahoo!’s expected return is 12% with a volatility of 26%. The stocks have a correlation of 0.92. What is the expected return and volatility of the portfolio?
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