Q4: Assume the following information for stocks A and B. • Expected return on Stock A = 18%. • Expected return on Stock B = 23%. • Correlation between returns of Stock A and Stock B = 0.10. • Standard deviation of returns on Stock A = 40%. • Standard deviation of returns on Stock B = 50%. Compute The expected return Standard deviation
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.
Q4:
Assume the following information for stocks A and B.
• Expected return on Stock A = 18%.
• Expected return on Stock B = 23%.
• Correlation between returns of Stock A and Stock B = 0.10.
• Standard deviation of returns on Stock A = 40%.
• Standard deviation of returns on Stock B = 50%.
Compute
The expected return
Standard deviation
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