Investing in Portfolios and CAPM - Essay Example

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Investing in Portfolios and CAPM

If the investor chooses alternative 1 and invests all the money in Evergreen, then he can earn a return of 13.8%. Since Evergreen is a safe company, therefore the standard deviation of returns is quite low and risk coefficient is only 0.11. One must keep in mind that by investing in this company, the investor is foregoing chance of earning high returns. In other words, the investor is foregoing chance of earning high returns for increased safety by investing in this company. On the other hand, in the case of alternative 2, if the investor decides to invest in more dynamic of the two companies ACE limited, then the investor is foregoing safety of investment for high returns. This will enable the investor to earn a return which is as high as 25%. However, the risk coefficient and standard deviation for this investment is also higher at 0.31 and 7.6% respectively. A third option is to invest in the form of an equally weighted portfolio. In this case, the returns have increased from what the investor could earn by investing solely in Evergreen and at the same time the high risk of investing in Ace Ltd has also been reduced. ...Show more

Summary

Running Head: Investing in Portfolios Investing in Portfolios and CAPM Name Date Alternative 1: Entire Investment in Evergreen Alternative 2: Entire Investment in Ace Limited: Alternative 3: Invest half the funds in Evergreen and half the funds in ACE: Alternative 4: 90% Investment in Evergreen and 10% investment in ACE: j The above calculation sheds light on the fact that it is very important to invest in portfolios rather than taking exposure in one type of investment…
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