1. Currently, the risk-free return is 3 percent and the expected market rate of return is 10 percent. What is the expected return of the following three-stock portfolio? 2. The market and Stock S have the following probability distributions: a. Calculate the expected rates of return for the market and Stock S. b. Calculate the standard deviations for the market and Stock S. c. Calculate the coefficients of variation for the market and Stock S.
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.
1. Currently, the risk-free return is 3 percent and the expected market rate of return is 10 percent. What is the expected return of the following three-stock portfolio?
2. The market and Stock S have the following probability distributions:
a. Calculate the expected rates of return for the market and Stock S.
b. Calculate the standard deviations for the market and Stock S.
c. Calculate the coefficients of variation for the market and Stock S.
Formula to calculate expected return using the CAPM is given by:
Expected return = Rf + beta(Rm - Rf)
where Rf is the risk free rate & Rm is the market rate of return
Formula to calculate portfolio beta is:
Amount invested/total amount*individual betas
Expected rate of return for the market & stock is given by:
Expected return = R1P1 + R2P2......RnPn
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