Hi, I am working on this problem but don't know how to solve it. Can you please show the steps in solving this corporate finance question? Question below: Consider a risky investment, Security 1, that costs $950 today, and pays you $900 in one year if the economy is weak, which occurs with a probability of 50%, or $1100 in one year if the economy is strong, which occurs with a probability of 50%. What is the expected payoff? What is the expected return? What is the risk premium?
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.
Hi,
I am working on this problem but don't know how to solve it. Can you please show the steps in solving this
Consider a risky investment, Security 1, that costs $950 today, and pays you $900 in one year if the economy is weak, which occurs with a probability of 50%, or $1100 in one year if the economy is strong, which occurs with a probability of 50%.
What is the expected payoff? What is the expected return? What is the risk premium?
Step by step
Solved in 3 steps
