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.
Q Describe Bonds and Stocks with their numerical formulas for calculating their intrinsic value?
Bonds:
Bonds are defined as fixed income instruments & is a unit of corporate debt that is issued by the company. It can be considered as IOU (i owe you) which exists between the borrower & the lender having details about loan & its payments. Bonds are issued by government, companies, municipals etc.
Bonds generally carry a maturity date on which the principal amount must be paid back in full. The most common type of bonds issued are municipal & corporate bonds.
Stocks:
Stocks refer to the ownership certificate of the company. The person holding the stock of the company is eligible to some proportion of the company's assets & also profits in terms of dividend according to the stocks owned by them. Shares are nothing but the units of stock.
The most popular type of stocks are preferred stocks & common stocks.
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