You recently purchased a stock that is expected to earn 25 percent in a booming economy, 10 percent in a normal economy, and lose 38 percent in a recessionary economy. There is a 10 percent probability of a boom and a 75 percent chance of a normal economy. What is standard deviation on this stock?
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 recently purchased a stock that is expected to earn 25 percent in a booming economy, 10 percent in a normal economy, and lose 38 percent in a recessionary economy. There is a 10 percent probability of a boom and a 75 percent chance of a normal economy. What is standard deviation on this stock?
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