If you added more stocks at random to the portfolio, which of the following is the most accurate statement of what would happen to p? (1) p would remain constant. (2) p would decline to somewhere in the vicinity of 20%. (3) p would decline to zero if enough stocks were included
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.
Stocks A and B have the following historical returns:
Year Stock A’s Returns, rA Stock B’s Returns, rB
2003 (18%) (24%)
2004 44 24
2005 (22) (4)
2006 22 8
2007 34 56
If you added more stocks at random to the portfolio, which of the following
is the most accurate statement of what would happen to p?
(1) p would remain constant.
(2) p would decline to somewhere in the vicinity of 20%.
(3) p would decline to zero if enough stocks were included.
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