You have recommended a portfolio comprising of 65 percent in a bond index and 35 percent in a stock index to one of your clients. The bond index has a return of 15% and a standard deviation of 12% per year and the stock index has a return of 20% and standard deviation of 16% per year. The correlation between the bond index and the stock index 37. 1. What is the expected return and standard deviation of this 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 recommended a portfolio comprising of 65 percent in a bond index and 35 percent in a stock index to one of your clients. The bond index has a return of 15% and a standard deviation of 12% per year and the stock index has a return of 20% and standard deviation of 16% per year. The correlation between the bond index and the stock index 37.
1. What is the expected return and standard deviation of this portfolio?
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