Question Assume that after completion of your MBA you have started working as a financial planner at Askari Capital Limited. In a second week of Job you have got assignment to invest Rupees 100,000 for a client. Because the funds are to be invested in a business at the end of 1 year, you have been instructed to plan for a 1-year holding
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.
Question
Assume that after completion of your MBA you have started working as a financial planner at Askari Capital Limited. In a second week of Job you have got assignment to invest Rupees 100,000 for a client. Because the funds are to be invested in a business at the end of 1 year, you have been instructed to plan for a 1-year holding period. Moreover, your manager has restricted you to the investment alternatives in the following table, shown with their probabilities and associated outcomes. (For now, disregard the items at the bottom of the data; you will fill in the blanks later.
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Estimated rate of returns |
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State of the |
Probability |
T-Bills |
Nescom |
Nawab |
PK_Steel |
Pak Market portfolio |
|
|
Recession |
0.1 |
3% |
-14.25 |
12.25 |
1.75 |
-9.75 |
|
|
Below average |
0.2 |
3% |
-4.75 |
5.25 |
-8.25 |
-2.75 |
|
|
Average |
0.4 |
3% |
6.25 |
-0.5 |
0.25 |
3.75 |
|
|
Above average |
0.2 |
3% |
13.75 |
-2.5 |
19.25 |
11.25 |
|
|
Boom |
0.1 |
3% |
21.25 |
-10 |
11.75 |
17.75 |
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Expectred Returns |
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St. Deviation |
0% |
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CV |
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Beta |
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Askari Capital staff has estimated the probability values for the state of the economy, and also estimated the corresponding
- Why is the T-bill’s return independent of the state of the economy? Do T-bills promise a completely risk-free return? Explain?
- Why are Nescom returns expected to move with the economy, whereas Nawab’s are expected to move counter to the economy?
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