Following is forecast for economic situation and Rachel’s portfolio returns next year, calculate the expected return, variance and standard deviation of the portfolio. State of economy Probability Rate of returns Mild Recession 0.35 - 5% Growth 0.45 15% Strong Growth 0.20 30%
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.
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Following is
forecast for economic situation and Rachel’s portfolio returns next year, calculate the expected return, variance and standard deviation of the portfolio.
|
State of economy |
Probability |
|
|
Mild Recession |
0.35 |
- 5% |
|
Growth |
0.45 |
15% |
|
Strong Growth |
0.20 |
30% |
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