Stock Number of shares Stock Price Beta A 750 33 1.2 B 220 51 0.8 C 460 19 1.4 Economic condition Probability A C Вoom 20% 20% 22% 23% Normal 50% 15% 10% 12% Recession 30% 2% 5% 7%
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.
A small market consists of three stocks, A, B, and C. and their financial data and projection are presented below. Assume
Find:
a) the expected return and standard deviation on this portfolio.
b) the expected return on the market using portfolio beta if Rf=5%.
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