Given the following information on a portfolio of Stock X and Stock Y, what is the portfolio standard deviation? Probability of boom state = 20% Probability of normal state = 80% Expected return on X = 13% Expected return on Y = 11% Variance on X = 0.0036 Variance on Y = 0.0144 Portfolio weight on X = 50% Portfolio weight on Y = 50% Correlation between X and Y = –1 Select one: a. 1% b. 2% c. 3% d. 6% e. 9%
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.
11-3
Given the following information on a portfolio of Stock X and Stock Y, what is the portfolio standard deviation?
- Probability of boom state = 20%
- Probability of normal state = 80%
- Expected return on X = 13%
- Expected return on Y = 11%
- Variance on X = 0.0036
- Variance on Y = 0.0144
- Portfolio weight on X = 50%
- Portfolio weight on Y = 50%
- Correlation between X and Y = –1
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