You have recently received $400,000 and you are considering investing $250,000 in the WIG and the remainder in TJH. Your analysis of each stock revealed the following information. The Expected Returns of both companies are 8% and 6% respectively and the Standard Deviations are 7% and 9% respectively. The correlation between the companies is 0.5. i. Compute the expected return of the portfolio ii. Compute the standard deviation of the portfolio iii. Given the results and any other computations, you deem relevant from the information presented, explain whether a rational risk-averse investor would prefer to invest in the suggested portfolio or 100% in WIG or 100% in TJH
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 recently received $400,000 and you are considering investing $250,000 in the WIG and the remainder in TJH. Your analysis of each stock revealed the following information. The Expected Returns of both companies are 8% and 6% respectively and the Standard Deviations are 7% and 9% respectively. The correlation between the companies is 0.5.
i. Compute the expected return of the portfolio
ii. Compute the standard deviation of the portfolio
iii. Given the results and any other computations, you deem relevant from
the information presented, explain whether a rational risk-averse investor would prefer to invest in the suggested portfolio or 100% in WIG or 100% in TJH
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