An oil exploration firm is currently searching for oil. Their probability of finding oil this year is 29% and if they hit oil we expect the stock to return 39%. If they do not hit oil we expect the stock to return -10%. What is the standard deviation of the return of the stock?
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 oil exploration firm is currently searching for oil. Their probability of finding oil this year is 29% and if they hit oil we expect the stock to return 39%. If they do not hit oil we expect the stock to return -10%. What is the standard deviation of the return of the stock?
Step by step
Solved in 3 steps with 2 images
