An investor estimates the expected returns of the following three shares as follows (for three alternative scenarios concerning the country's likely economic situation in the near future): Scenarios Probability of scenario occurrence Expected performance share A Expected performance share B Expected performance share C Recession 20% 4% 10% 3% Stabilization 60% 6% 6% 6% Development 20% 8% 2% 9% A) For shares A, B and C find: the expected yield, the risk (standard deviation), and the coefficient of variability. Which stock would you choose according to the criterion of the coefficient of volatility
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.
(3) An investor estimates the expected returns of the following three shares as follows (for three alternative scenarios concerning the country's likely economic situation in the near future):
|
Scenarios |
Probability of scenario occurrence |
Expected performance share A |
Expected performance share B |
Expected performance share C |
|
Recession |
20% |
4% |
10% |
3% |
|
Stabilization |
60% |
6% |
6% |
6% |
|
Development |
20% |
8% |
2% |
9% |
- A) For shares A, B and C find:
- the expected yield,
- the risk (standard deviation), and
- the coefficient of variability.
Which stock would you choose according to the criterion of the coefficient of volatility?
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