Stocks for Fumbeshi and Mundashi have the following historical returns: Year Fumbeshi Mundashi 2010 -18% -14.50% 2011 33% 21.80% 2012 15% 30.50% 2013 -0.50% -7.60% 2015 27% 26.30% (i) What is the average return rate of return for each stock during the period 2010 through 2015? (ii) Assuming someone held a portfolio consisting of 50 percent of stocks Fumbeshi and 50 percent stocks of Mundashi, what would have been the realized return on the portfolio during this period? (iii) What is the standard deviation of each stock during the period 2010 through 2015?
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 for Fumbeshi and Mundashi have the following historical returns:
| Year | Fumbeshi | Mundashi |
| 2010 | -18% | -14.50% |
| 2011 | 33% | 21.80% |
| 2012 | 15% | 30.50% |
| 2013 | -0.50% | -7.60% |
| 2015 | 27% | 26.30% |
(i) What is the average return
(ii) Assuming someone held a portfolio consisting of 50 percent of stocks Fumbeshi and 50 percent stocks of Mundashi, what would have been the realized return on the portfolio during this period?
(iii) What is the standard deviation of each stock during the period 2010 through 2015?
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