Consider an economy with just two assets. The details of these are given below. Number of Shares Price Expected Return Standard Deviation A 100 1.5 15 15 B 150 2 12 9 The correlation coefficient between the returns on the two assets is 1=3 and there is also a risk-free asset. Assume the CAPM model is satisfied. (1) What is the expected rate of return on the market portfolio? (2) What is the standard deviation of the market portfolio? (3) What is the beta of stock A? (4) What is the risk-free rate of return?
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.
Consider an economy with just two assets. The details of these are given below.
|
Number of Shares |
Price |
Expected Return |
Standard Deviation |
|
|
A |
100 |
1.5 |
15 |
15 |
|
B |
150 |
2 |
12 |
9 |
The correlation coefficient between the
there is also a risk-free asset. Assume the
(1) What is the expected
(2) What is the standard deviation of the market portfolio?
(3) What is the beta of stock A?
(4) What is the risk-free rate of return?
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