Assume that a project is expected to produce the following cash flows in each year, each periodic cash flow is independent of every other, and the risk-free rate is 6%: Period Expected Cash Flow Estimated Standard Deviation 0 -$2,000 $100 1 $1,000 $200 2 $2,000 $500Find the expected NPW as well as the variance of the NPW.
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.
Assume that a project is expected to produce the following cash flows in each year, each periodic cash flow is independent of every other, and the risk-free rate is 6%:
Period Expected Cash Flow Estimated Standard Deviation
0 -$2,000 $100
1 $1,000 $200
2 $2,000 $500
Find the expected NPW as well as the variance of the NPW.
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