Returns State of Economy Prob J K Recession 0.25 -0.02 0.034 Normal 0.6 0.138 0.062 Boom 0.15 0.218 0.092 Based on the following information, 1. calculate the expected return and standard deviation for each of the following stocks. 2.What are the covariance and correlation between the returns of the two stocks? 3.Calculate the portfolio return and portfolio standard deviation if you invest equally in each asset.
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.
|
|
Returns |
||
|
State of Economy |
Prob |
J |
K |
|
Recession |
0.25 |
-0.02 |
0.034 |
|
Normal |
0.6 |
0.138 |
0.062 |
|
Boom |
0.15 |
0.218 |
0.092 |
Based on the following information,
1. calculate the expected return and standard deviation for each of the following stocks.
2.What are the covariance and correlation between the returns of the two stocks?
3.Calculate the portfolio return and portfolio standard deviation if you invest equally in each asset.
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