A stock will have a loss of 10.6 percent in a bad economy, a return of 10.4 percent in a normal economy, and a return of 24.3 percent in a hot economy. There is 28 percent probability of a bad economy, 41 percent probability of a normal economy, and 31 percent probability of a hot economy. What is the variance of the stock's returns?
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 stock will have a loss of 10.6 percent in a bad economy, a return of 10.4 percent in a normal economy, and a return of 24.3 percent in a hot economy. There is 28 percent probability of a bad economy, 41 percent probability of a normal economy, and 31 percent probability of a hot economy. What is the variance of the stock's returns?
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