You are trying to decide whether to invest in one or both of two different stocks. The market risk premium and risk-free rate are 6 percent and 4 percent respectively. Beta Expected Return (%) Stock 1 beta 0.8 % expected return7.0 Stock 2 beta 1.2 %expected return 9.5 Use your knowledge of the CAPM and the SML which and determine whether you should invest in either, one, or both of these stocks.
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.
You are trying to decide whether to invest in one or both of two different stocks. The market
risk premium and risk-free rate are 6 percent and 4 percent respectively.
Beta Expected Return
(%)
Stock 1 beta 0.8 % expected return7.0
Stock 2 beta 1.2 %expected return 9.5
Use your knowledge of the
whether you should invest in either, one, or both of these stocks. Provide all workings
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