Assume that the average annual historical return for shares that comprise the Australian All Ordinaries index is 10%, and the standard deviation of returns is 20%. Based on these numbers, what is a 95% prediction interval for 2016 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.
Assume that the average annual historical return for shares that comprise the Australian All Ordinaries index is 10%, and the standard deviation of returns is 20%. Based on these numbers, what is a 95% prediction interval for 2016 returns?
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