3. Forecasting stock value Understanding the returns from investing When buying stock, you can expect to earn money through future current income (from     ) and future capital appreciation (from     ). Together, your total earnings from a given investment can be expressed in terms of the approximate yield. This value makes it easier for you to compare investment options.   Understanding the Approximate Yield Equation The formula for the approximate yield of an investment can look intimidating, but it’s really just a function of three things: (1) average current income, (2) average capital gains, and (3) the average value of the investment. Based on the information in the table, compute each of these values for the two stocks over a 3-year period and enter the values into the bottom half of the table.   Stock 1 Stock 2 Expected average annual dividends (2012–2014) $0.95 $2.65 Current stock price $50 $119 Expected future stock price (2014) $62 $149 Average current income (CI) $   $   Average capital gains (CG) $   $   Average value of the investment (VI) $   $     Next, derive the correct formula for approximate yield by correctly arranging these three variables in the equation that follows. Approximate YieldApproximate Yield  =  =        /  /

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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.