An investor is faced with the decision of whether to invest in a stock with an expected return of 14% or a stock in the same industry with an expected 20% return. Which of the following seems most likely? Multiple Choice the 20% stock is a better investment. the 14% stock is overpriced. Both stocks will have approximately the same return. Both stocks are priced correctly given their perceived risk.
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 investor is faced with the decision of whether to invest in a stock with an expected return of 14% or a stock in the same industry with an expected 20% return. Which of the following seems most likely? Multiple Choice the 20% stock is a better investment. the 14% stock is overpriced. Both stocks will have approximately the same return. Both stocks are priced correctly given their perceived risk.
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