1. Suppose you observe the following situation: State of Economy Probability of State of Economy Return of Stock A Return of Stock B Bust .15 -.08 -.10 Normal .60 .11 .09 Boom .25 .30 .27 Calculate the expected return on each 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.
Hi can you help me with these two problem down below
1. Suppose you observe the following situation:
|
State of Economy |
Probability of State of Economy |
Return of Stock A |
Return of Stock B |
|
Bust |
.15 |
-.08 |
-.10 |
|
Normal |
.60 |
.11 |
.09 |
|
Boom |
.25 |
.30 |
.27 |
Calculate the expected return on each stock.
2. Indicate whether the following events might cause stocks in general to change price, and whether they might cause Big Widget Corp.’s stock to change price:
-
- The government announces that inflation unexpectedly jumped by 2 percent last month.
- Big Widget’s quarterly earnings report, just issued, generally fell in line with analysts’ expectations.
- The government reports that
economic growth last year was at 3 percent, which generally agreed with most economists’forecasts. - The directors of Big Widget die in a plane crash.
- Congress approves changes to the tax code that will decreases the top marginal corporate tax rate. The legislation had been debated for the previous six months.
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