Below is a table of probabilities and expected returns for 2 securities under 3 possible scenarios: Posible outcomes Prababilty Rate of return Company G Rate of return Company H Bullish Trend 0.3 50% 25% Normal Trend 0.4 20% 15% Bearish Trend 0.3 10% 15% Required: On the basis of Expected Rate of Return, Standard Deviation, Variance and Coefficient of variation decide which of the above companies is best for investment (Single company Risk analysis).
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.
Below is a table of probabilities and expected returns for 2 securities under 3 possible scenarios:
| Posible outcomes | Prababilty |
Company G |
Rate of return Company H |
|
Bullish Trend |
0.3 | 50% | 25% |
| Normal Trend | 0.4 | 20% | 15% |
| Bearish Trend | 0.3 | 10% | 15% |
Required:
On the basis of Expected Rate of Return, Standard Deviation, Variance and Coefficient
of variation decide which of the above companies is best for investment (Single company
Risk analysis).
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