Consider the following data State of Nature Prob. Stock A Return Boom 0.3 16.00% Normal 0.6 14.20% Recession 0.1 8.00% If the current rate on a treasury bill is 4%, what is the risk premium on the stock? (Note: treasury bill rate is generally regarded as risk free rate) Group of answer choices 10.12% 8.14% 14.12% 11.12%
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.
Consider the following data
|
State of Nature
|
Prob.
|
Stock A Return
|
|
Boom
|
0.3
|
16.00%
|
|
Normal
|
0.6
|
14.20%
|
|
Recession
|
0.1
|
8.00%
|
If the current rate on a treasury bill is 4%, what is the risk premium on the stock? (Note: treasury bill rate is generally regarded as risk free rate)
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