Stocks A and B have the following returns: Stock A Stock B 1 0.09 0.06 2 0.05 0.02 0.13 0.05 4 - 0.01 0.02 0.08 - 0.03 a. What are the expected returns of the two stocks? b. What are the standard deviations of the returns of the two stocks? c. If their correlation is 0.48, what is the expected return and standard deviation of a portfolio of 52% stock A and 48% stock B?
Stocks A and B have the following returns: Stock A Stock B 1 0.09 0.06 2 0.05 0.02 0.13 0.05 4 - 0.01 0.02 0.08 - 0.03 a. What are the expected returns of the two stocks? b. What are the standard deviations of the returns of the two stocks? c. If their correlation is 0.48, what is the expected return and standard deviation of a portfolio of 52% stock A and 48% stock B?
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 15P
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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.
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Transcribed Image Text:Stocks A and B have the following returns:
Stock A
Stock B
1
0.09
0.06
0.05
0.02
3
0.13
0.05
4
- 0.01
0.02
5
0.08
- 0.03
a. What are the expected returns of the two stocks?
b. What are the standard deviations of the returns of the two stocks?
c. If their correlation is 0.48, what is the expected return and standard deviation of a portfolio of 52% stock A and 48% stock B?
a. What are the expected returns of the two stocks
The expected return for stock A is 1. (Round to three decimal places.)
The expected return for stock B is 1. (Round to three decimal places.)
b. What are the standard deviations of the returns of the two stocks?
The standard deviation of the return for stock A is 1. (Round to four decimal places.)
The standard deviation of the return for stock B is 1. (Round to four decimal places.)
c. If their correlation is 0.48, what is the expected return and standard deviation of a portfolio of 52% stock A and 48% stock B?
The expected return for the portfolio is 1. (Round to four decimal places.)
The standard deviation of the return for the portfolio is 1. (Round to four decimal places.)
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