Suppose we obtain the following data in dollar terms: Stock market Return (mean) Risk (SD) United States 1.26% per month 4.43% United Kingdom 1.23% per month 5.55% The correlation coefficient between the two markets is 0.58. Suppose that you invest equally, i.e., 50% each, in the two markets. Determine the expected return and standard deviation risk of the resulting international portfolio.
Suppose we obtain the following data in dollar terms: Stock market Return (mean) Risk (SD) United States 1.26% per month 4.43% United Kingdom 1.23% per month 5.55% The correlation coefficient between the two markets is 0.58. Suppose that you invest equally, i.e., 50% each, in the two markets. Determine the expected return and standard deviation risk of the resulting international portfolio.
Chapter13: Direct Foreign Investment
Section: Chapter Questions
Problem 2IEE
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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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