Consider information given in the table below and answers the question asked thereafter: State Probability return on stock A Return on stock B A 0.15 10% 9% B 0.15 6% 15% C 0.10 20% 10% D 0.18 5% -8% E 0.12 -10% 20% F 0.30 8% 5% i. Calculate expected return on each stock? On the basis of this measure, which stock you will choose? ii. Calculate standard deviation of the returns on each stock? On the basis of this measure, which stock you will choose? iii. Calculate coefficient of variance of the returns on each stock? On the basis of this measure, which stock you will choose?
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.
Consider information given in the table below and answers the question asked thereafter:
| State | Probability | return on stock A | Return on stock B |
| A | 0.15 | 10% | 9% |
| B | 0.15 | 6% | 15% |
| C | 0.10 | 20% | 10% |
| D | 0.18 | 5% | -8% |
| E | 0.12 | -10% | 20% |
| F | 0.30 | 8% | 5% |
i. Calculate expected return on each stock? On the basis of this measure, which stock
you will choose?
ii. Calculate standard deviation of the returns on each stock? On the basis of this
measure, which stock you will choose?
iii. Calculate coefficient of variance of the returns on each stock? On the basis of this
measure, which stock you will choose?
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