If the economy prospers, shares of Fitbit (ticker symbol: FIT) are expected to return 11%. But, if the economy falters, shares of Fitbit are expected to return 4%. According to equity analysts at Bank of America, over the next year, there is a 61% chance of an economic upturn and a 39% likelihood of an economic downturn. Given this information, Fitbit has a variance of returns equal to: a. 0.000273 b. 0.001544 c. 0.033819 d. 0.001166 e. 0.000827
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 economy prospers, shares of Fitbit (ticker symbol: FIT) are expected to return 11%. But, if the economy falters, shares of Fitbit are expected to return 4%. According to equity analysts at Bank of America, over the next year, there is a 61% chance of an economic upturn and a 39% likelihood of an economic downturn. Given this information, Fitbit has a variance of returns equal to:
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