various investment alternatives for each scenario. Answer the questions that follow. State of the Economy Recession Below Average Average Above Average Boom Mean Standard Deviation Coefficient of Variation Covariance with MP Correlation with Market Index Beta CAPM Req. Return Valuation (Overvalued/Undervalued/Fairly Valued) Nature of stock Probability 0.2 0.1 0.3 0.3 0.1 % Return on T-Bills, Stocks and Market Index T- Bills 7 7 7 7 7 Phillips -22 -2 20 35 50 Pay- Rubber- up made 28 10 14.7 -10 0 7 - 10 45 30 -20 Market Index -13 1 15 29 43
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.
Note: All computations must be done and shown manually. No spreadsheet computations are allowed.
question 1
Fill the parts in the above table that are shaded in yellow. You will notice that there are nine line items. Each line item is worth
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