n investor has an opportunity to invest in two risky assets and a risk-free asset. The expected return of the two risky assets are μ1 = 0.12, μ2 = 0.15. Their standard deviations are σ1 = 0.05 and σ2 = 0.1, and the correlation coefficient between their return is 0.2. The risk-free rate is 0.05. Suppose the investor has $1000 and he wants to hold a portfolio with expected return of 0.1. If the investor is risk averse, how much should he invest in the two risky assets and the risk-free asset?
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.
An investor has an opportunity to invest in two risky assets and a risk-free asset. The
expected return of the two risky assets are μ1 = 0.12, μ2 = 0.15. Their standard
deviations are σ1 = 0.05 and σ2 = 0.1, and the correlation coefficient between their
return is 0.2. The risk-free rate is 0.05. Suppose the investor has $1000 and he wants
to hold a portfolio with expected return of 0.1. If the investor is risk averse, how much
should he invest in the two risky assets and the risk-free asset?
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