Suppose that the average stock has a volatility of 57%, and that the correlation between pairs of stocks is 18%. Estimate the volatility of an equally weighted portfolio with: a. 1 stock b. 30 stocks c. 1,000 stocks

Suppose that the average stock has a volatility of 57%, and that the correlation between pairs of stocks is 18%. Estimate the volatility of an equally weighted portfolio with: a. 1 stock b. 30 stocks c. 1,000 stocks

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

Suppose that the average stock has a volatility of 57%, and that the correlation between pairs of stocks is 18%. Estimate the volatility of an equally weighted portfolio with:

a. 1 stock

b. 30 stocks

c. 1,000 stocks

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Step 1: Explanation of portfolio volatility

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Step 2: the volatility of an equally weighted portfolio with 1 stock

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Step 3: the volatility of an equally weighted portfolio with 30 stock

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Step 4: the volatility of an equally weighted portfolio with 1000 stock

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