Expected return on two stocks for two particular market returns: Market Return Aggressive Stock Defensive Stock 4% -5% 7% 20% 25% 14% What are the betas of the two stocks? What is the expected rate of return on each stock if the market return is equally likely to be 4% or 20%? If the T-bill rate is 5% and the market return is equally likely to be 4% or 20%, draw the SML for this economy.
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.
- Expected return on two stocks for two particular market returns:
Market Return Aggressive Stock Defensive Stock
4% -5% 7%
20% 25% 14%
- What are the betas of the two stocks?
- What is the expected
rate of return on each stock if the market return is equally likely to be 4% or 20%? - If the T-bill rate is 5% and the market return is equally likely to be 4% or 20%, draw the SML for this economy.
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