Compute the correlation between assets A and B if you know that the standard deviation of B is 50% of the standard deviation of A and the covarancce between the two assets is 0.5 times the variance of asset A. What is the risk (measured as the variance) of the portfolio created by investing 50% in asset A and 50% in asset B in the previous point? Assume that the variance of the asset A is 4/9.
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.
Compute the correlation between assets A and B if you know that the standard deviation of B is 50% of the standard deviation of A and the covarancce between the two assets is 0.5 times the variance of asset A.
What is the risk (measured as the variance) of the portfolio created by investing 50% in asset A and 50% in asset B in the previous point? Assume that the variance of the asset A is 4/9.
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