Your client has $105,000 invested in stock A. She would like to build a two-stock portfolio by investing another $105,000 in either stock B or C. She wants a portfolio with an expected return of at least 14.5% and as low a risk as possible, but the standard deviation must be no more than 40%. What do you advise her to do, and what will be the portfolio expected return and standard deviation? Expected Return A B C 15% 14% 14% Standard Deviation 45% 36% 36% Correlation with A 1.00 0.14 0.27

Your client has $105,000 invested in stock A. She would like to build a two-stock portfolio by investing another $105,000 in either stock B or C. She wants a portfolio with an expected return of at least 14.5% and as low a risk as possible, but the standard deviation must be no more than 40%. What do you advise her to do, and what will be the portfolio expected return and standard deviation? Expected Return A B C 15% 14% 14% Standard Deviation 45% 36% 36% Correlation with A 1.00 0.14 0.27

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter2: Risk And Return: Part I

Section: Chapter Questions

Problem 6MC

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Concept explainers

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.

Question

Your client has $105,000 invested in stock A. She would like to build a two-stock portfolio by investing another
$105,000 in either stock B or C. She wants a portfolio with an expected return of at least 14.5% and as low a risk
as possible, but the standard deviation must be no more than 40%. What do you advise her to do, and what will be
the portfolio expected return and standard deviation?
Expected Return
15%
14%
14%
A
B
C
Standard Deviation
45%
36%
36%
Correlation with A
1.00
0.14
0.27

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