If the current price of a stock is $30, and you believe that price changes follow a random walk, what is your best estimate for the expected price tomorrow.
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.
If the current price of a stock is $30, and you believe that price changes follow a random walk, what is your best estimate for the expected price tomorrow.
A) 0
B) 25
C) 30
D) 35
E) 40
Random walk theory states that the changes in the price of the stock are independent of each other. It tells that the stock takes an unpredictable path by claiming that the investment advisors will not take add any value to the portfolio. This theory was introduced by Louise Bachelier.
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