A portfolio of 2 stocks has 40% of the money invested in stock 1 and the remainder in stock 2. Stock 1 has an annual return of 8% and a standard deviation of 10%. Stock 2 has an annual return of 6% and a standard deviation of 4%. The two stocks have a correlation of 0.6. The expected annual return of the portfolio is:
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.
A portfolio of 2 stocks has 40% of the money invested in stock 1 and the remainder in stock 2. Stock 1 has an annual return of 8% and a standard deviation of 10%. Stock 2 has an annual return of 6% and a standard deviation of 4%. The two stocks have a correlation of 0.6. The expected annual return of the portfolio is:
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