If more randomly selected stocks had been included in the portfolio, which of the following is the most accurate statement of what would have happened to p?
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.
Please answer d part
3. Stocks A and B have the following historical returns:
Year Stock A return Stock B return
2004 (24.25%) 5.5%
2005 18.5% 26.73%
2006 38.67% 48.25%
2007 14.33% (4.5%)
2008 39.13% 43.86%
a) Calculate the average
What would the realized rate of return on the portfolio have been in each year from 2004 through 2008? What would the average return on the portfolio have been during that period?
b) Calculate the standard deviation of returns for each stock and for the portfolio.
c) Looking at the annual returns on the two stocks, would you guess that the correlation coefficient between the two stocks is closer to +0.8 or to –0.8?
d) If more randomly selected stocks had been included in the portfolio, which of the following is the most accurate statement of what would have happened to p?
I. p would have remained constant.
II. p would have been in the vicinity of 20%.
III. p would have declined to zero if enough stocks had been included.
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