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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.
The covariance of the market's returns with the stock's returns is 0.008. The standard deviation of
the market's returns is 0.08, and the standard deviation of the stock's returns is 0. 11. What is the
correlation coefficient of the returns of the stock and the returns of the market?
Step by step
Solved in 3 steps
- What is the correlation between returns of stock S and T, given that covariance between stocks is 2.419 and standard deviation are 1.23 and 2.21, respectively.(a) A stock’s returns have the following distribution: Calculate the stock’s expected return, standard deviation, and the coefficient of variation.a. The standard deviation of returns is 0.30 for Stock A and 0.20 for Stock B. The covariance betweenthe returns of A and B is 0.006. The correlation of returns between A and B is:
- The metric that is used to show the extent to which a given stock’s return move up and down with the stock market? a. Correlation b. Beta c. Standard deviation d. Expected returnUsing the data in the following table,, estimate the: a. Average return and volatility for each stock. b. Covariance between the stocks. c. Correlation between these two stocks.(c) Consider information given in the table below and answers the question asked thereafter: i. Calculate expected return on each stock? On the basis of this measure, which stock you will choose?ii. Calculate standard deviation of the returns on each stock? On the basis of this measure, which stock you will choose?iii. Calculate coefficient of variance of the returns on each stock? On the basis of this measure, which stock you will choose?iv. Calculate covariance and coefficient of correlation between the returns of the stocks A and B.v. Now suppose you have $100,000 to invest and you want to a hold a portfolio comprising of $35,000 invested in stock A and remaining amount in stock B. Calculate risk and return of your portfolio. (d) Firm A reports a Profit Margin of 6.5% and a Total Asset Turnover Ratio of 3.25. Their total asset level is $8,500,000. Assume there are 700,000 shares outstanding and the PE ratio is 11. Also, assume the Return on Equity is 16%. Based on this, calculate…
- If the standard deviation of stock 'A' is .25, the standard deviation of stock 'B' is .30, and the correlation between stocks 'A' and 'B' is 0.7, the covariance between stocks 'A' and 'B' is___.When working with the CAPM, which of the following factors can be determined with the most precision? a. The beta coefficient of "the market," which is the same as the beta of an average stock. b. The beta coefficient, bi, of a relatively safe stock. c. The market risk premium (RPM). d. The most appropriate risk-free rate, rRF. e. The expected rate of return on the market, rM.You are conducting some statistical analyses on two securities: Stock X and Stock Y. You find that Stock X has a volatility (i.e., a standard deviation) of 5.78%, while Stock Y has a volatility of 7.94%. If the correlation between the returns of the two firms is 0.25, then what is the covariance between the returns of the two firms closest to? O 0.0011 0.0021 O 11.47 O 21.55 0
- 1) what is the expected return rate for stock A 2) what is the expected return rate for stock B 3) what is the standard deviation of returns for stock A 4) what is the standard deviation of returns for stock B.Exercises: a. The standard deviation of returns is 0.30 for Stock A and 0.20 for Stock B. The covariance between the returns of A and B is 0.006. The correlation of returns between A and B is: b. Explain the differences between systemic risk and unsystematic risk, give additional examples c. Compare and contrast the Capital Market Line and Security Market Line d. The covariance of the market's returns with the stock's returns is 0.008. The standard deviation of the market's returns is 0.08, and the standard deviation of the stock's returns is 0. 11. What is the correlation coefficient of the returns of the stock and the returns of the market? e. According to the CAPM, what is the required rate of return for a stock with a beta of 0.7, when the risk-free rate is 7% and the expected market rate of return is 14%(b) the standard deviation of the returns of the stocks A and B