An investment analyst estimates the following probabilities of return depending on the state of the economy. Business conditions Boom Good Normal Recession Poor Probability 0.05 0.25 0.40 0.25 0.05 Petronas share return % 12 10 4 -2 -7 Maxis share return % 26 12 8 -6 -22 Berjaya share return % 41 23 12 -27 -55 Expected risk of the above shares
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.
- An investment analyst estimates the following probabilities of return depending on the state of the economy.
|
Business conditions |
Boom |
Good |
Normal |
Recession |
Poor |
|
Probability |
0.05 |
0.25 |
0.40 |
0.25 |
0.05 |
|
Petronas share return % |
12 |
10 |
4 |
-2 |
-7 |
|
Maxis share return % |
26 |
12 |
8 |
-6 |
-22 |
|
Berjaya share return % |
41 |
23 |
12 |
-27 |
-55 |
Expected risk of the above shares
Step1: Risk
Risk: It refers to an outcome of uncertainty, which is non-predictable in nature. In security, evaluation Risk is measured through a Statistical tool known as Standard deviation.
Risk of Shares =
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