Risk is usually measured in terms of the volatility in the historical retums generated by shares. Is this a good indicator of future risks in fast changing sectors? What implications does this have for the analysis ofrisk?
Risk is usually measured in terms of the volatility in the historical retums generated by shares. Is this a good indicator of future risks in fast changing sectors? What implications does this have for the analysis ofrisk?
Chapter8: Risk And Rates Of Return
Section: Chapter Questions
Problem 18PROB
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Concept explainers
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
Transcribed Image Text:Question four
Risk is usually measured in terms of the volatility in the historical returns generated by shares. Is
this a good indicator of future risks in fast changing sectors? What implications does this have
for the analysis of risk?
Question five
Explain briefly what beta (the relative risk) measures. Is this the only type of risk that a fim faces?
Question six
(a) Stocks A and market have the following estimated returns:
RA
RM
year
2018
-18%
-24%
2019
44%
24%
2020
-22%
-4%
2021
22%
8%
2022
34%
56%
Required to
)Calculate the expected rate of return for stock A and Market đuring the 5-year period.
(ii) Now calculate the total risk of stock A and Market
(b)The market M and Stock J have the following probability distributions:
State of the economy
Probability
RM
RJ
Вoom
0.3
15%
20%
Depression
Recovery
0.4
9%
5%
0.3
18%
12%
Required to
(1) Calculate the expected rates of retum for the market and Stock J.
(ii) Calculate the standard deviations for the market and Stock J.
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