Stock 1 Stock 2 Realized Realized Year End Return Return 2004 20.1% -14.6% 2005 72.7% 4.3% 2006 -25.7% -58.1% 2007 56.9% 71.1% 2008 6.7% 17.3% 2009 17.9% 0.9% Suppose you have a portfolio that is made up of 70% investments in Stock 1 and 30% investments in Stock 2. Compute:

Stock 1 Stock 2 Realized Realized Year End Return Return 2004 20.1% -14.6% 2005 72.7% 4.3% 2006 -25.7% -58.1% 2007 56.9% 71.1% 2008 6.7% 17.3% 2009 17.9% 0.9% Suppose you have a portfolio that is made up of 70% investments in Stock 1 and 30% investments in Stock 2. Compute:

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter8: Risk And Rates Of Return

Section: Chapter Questions

Problem 10PROB

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Concept explainers

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.

Question

Consider the following returns of Stock 1 and Stock 2:
Stock 1
Stock 2
Realized
Realized
Year End Return
Return
2004 20.1%
-14.6%
2005 72.7%
4.3%
2006 -25.7%
-58.1%
2007 56.9%
71.1%
2008 6.7%
17.3%
2009 17.9%
0.9%
Suppose you have a portfolio that is made up of 70%
investments in Stock 1 and 30% investments in Stock 2.
Compute:
1) Average annual return of the portfolio from 2004 to 2009;
2) Variance of the portfolio;
3) Standard deviation of the portfolio.

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