Four analysts cover the stock of Fluorine Chemical. One forecasts a 6% return for the coming year. The second expects the return to be −5%. The third predicts a return of 11%. The fourth expects a 3% return in the coming year. You are relatively confident that the return will be positive but not large, so you arbitrarily assign probabilities of being correct of 34%, 8%, 19%, and 39%, respectively, to the analysts' forecasts. Given these probabilities, what is Fluorine Chemical's expected return for the coming year?
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.
Four analysts cover the stock of Fluorine Chemical. One
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