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Q2: How to compute the expected return and the risk (standard deviation) for a two-stock portfolio?...

Q2: How to compute the expected return and the risk (standard deviation) for a two-stock portfolio?

Q3: In CAPM, what’s beta? What kind of risk is the beta used to measure? How to calculate an individual stock’s beta based on its definition?

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Answer #1

1.
expected returns=(weight of A*returns of A+weight of B*returns of B)

standard deviation=sqrt((weight of A*standard deviation of A)^2+(weight of B*standard deviation of B)^2+2*weight of A*weight of B*covariance between A and B)

2.
Beta is measure of stock's volatility in relation to overall market.

Beta is used to measure market or systematic or undiversifiable risk.

To calculate beta of individual stock, regress the excess stock returns (stock returns-risk free rate) as dependent variable over excess market returns (market returns-risk free rate) as independent variable. Beta is the slope of the regression line.

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