Capitial Investment hired a new analyst Jack Lee to evaluate a portfolio consisting of two stocks, Meta Platforms Inc (FB) and Walmart Inc (WMT). After exercising due diligence, Jack forecasts FB stock has an expected return of 15% and standard deviation of 25%, while WMT stock has an expected return of 10% and standard deviation of 20%. The correlation coefficient between stock returns of FB amd WMT is 0.4 and risk-free rate is 3%. If Jack is asked to design a optimal portfolio based on the above forecast, the proportion of the optimal risky portfolio that should be invested in WMT stock is O 52.3% O 36.7% O 63.3% O 47.7%
Capitial Investment hired a new analyst Jack Lee to evaluate a portfolio consisting of two stocks, Meta Platforms Inc (FB) and Walmart Inc (WMT). After exercising due diligence, Jack forecasts FB stock has an expected return of 15% and standard deviation of 25%, while WMT stock has an expected return of 10% and standard deviation of 20%. The correlation coefficient between stock returns of FB amd WMT is 0.4 and risk-free rate is 3%. If Jack is asked to design a optimal portfolio based on the above forecast, the proportion of the optimal risky portfolio that should be invested in WMT stock is O 52.3% O 36.7% O 63.3% O 47.7%
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter3: Risk And Return: Part Ii
Section: Chapter Questions
Problem 2MC: You have been hired at the investment firm of Bowers & Noon. One of its clients doesn’t understand...
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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.
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