Assume these are the stock market and Treasury bill returns for a 5-year period: Year Stock Market Return (8) 2016 2017 2018 2019 2020 32.70 12.10 -2.80 13.80 22.50 T-Bill Return (8) 0.08 0.08 0.08 0.26 0.28 Required: a. What was the risk premium on common stock in each year? b. What was the average risk premium? c. What was the standard deviation of the risk premium? (Ignore that the estimation is from a sample of data.)

Q: Define risk-adjusted cost of capital (r)

A: Risk adjusted cost of capital is the measure of returns of a project relative to the risks of a…

Q: DEFINE credit policy

A: Credit policy is the set of policies governing a company’s credit sales, outstanding amounts;…

Q: Describe term net asset value (NAV)?

A: Net asset value (NAV): It describes an entity's net worth, which is measured as the complete value…

Q: of computing vat payable

A: VAT refers to the type of tax imposed by the government over the sale of goods and services.

Q: describe uses and limitations of the balance sheet in fi nancial analysis;

A: Introduction: The balance sheet provides users with information on the firm’s assets, liabilities…

Q: Working Capital

A: Working capital = Current Assets - Current Liabilities  We know that current assets and current…

Q: Type of CPM Loan?

A: Introduction: CPM refers to constant payment mortgage, this is nothing but an arrangement…

Q: fferent ty

A: Define interest. In finance, or economics interest can be defined as the payment of a proportion…

Q: Create simple examples to illustrate the following concepts. i. Time value of money ii. Effective…

A: i) Time Value of Money: The concept of time value of money underlines that the value of money today…

Q: Define mezzanine loan?

A: Mezzanine funding: Mezzanine funding is a type of funding that has together the characteristics of…

Q: Define capital requirement ratio (CR)

A: Answer: Capital requirements are nothing but regulatory guidelines for banks that specify the amount…

Q: Wat is investment

A: According to the standards, investment can be classified into three categories, i.e. held to…

Q: what is Thread Financial Analysis?

A: Financial reporting is a detailed record of all corporate activities, including costs and profits,…

Q: Write the methods of Calculating Interest?

A: Methods of calculating interest: The basic and fundamental methods for calculating interests are…

Q: What are collaterals?

A: Assets are those resources that have some economic value held by an corporation, individual, or…

Q: Define compound interest

A: Compound interest: Compound interest is the accumulation of interest to the principal amount of a…

Q: Define Liquidity Analysis?

A: Liquidity analysis is very essential as it shows the ability of the firm in paying short-term bills.…

Q: Define Valuation allowance

A: Valuation allowances are reserves created, which can set off deferred tax assets. If it is probable…

Q: Define asset management ratios

A: Asset management ratio: It ascertains the estimation of the sales or revenues of an organization…

Q: Differentiate between a capital investment and an expense investment

A: Investment refers to the allocation of the funds in the assets in order to get returns. The…

Q: Define Credit analysis

A: Credit analysis is the method by which the creditworthiness of a business or organization is…

Q: Define credit enhancement

A: Borrowings are the liability of the company which is used to finance the requirement of the funds.…

Q: What is moderate policy (current assets)?

A: Moderate policy is the policy which makes the balance between restricted and relaxed policies. It is…

Q: Define reinvestment rate risk

A: Reinvestment means investing without withdrawing the benefits (or) interest from the fund so that it…

Q: Define Monetary/non-monetary method

A: Monetary and Non-Monetary Method Monetary Assets/Liabilities - Assets/Liabilities whose value…

Q: What is collateral? Give an a example.

A: Consumer Loans: This type of loan are user by common people to finance their personal expenditure or…

Q: Derivation of capital asset pricing model

A: The Capital Asset Pricing Model (CAPM) relates the returns on individual assets or entire portfolios…

Q: Define Interest cost.

A: Cost: The amount paid to purchase the asset, install it, and put it into operations, is referred to…

Q: Define Capital Market Line (CML)

A: Introduction: Risk refers to the degree of volatility involved in the anticipated return on…

Q: What can be considered collateral. What is collateral

A: Collateral is an asset or property that a borrower pledges as security for a loan or credit. If the…

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.