In the table below x denotes the X-Tract Company’s projected annual profit (in $1,000). The table also shows the probability of earning that profit. The negative value indicates a loss. x f(x) x = profit -100 0.01 f(x) = probability -200 0.04 0 100 0.26 200 0.54 300 0.05 400 0.02 10 On average, profit (loss) amounts deviate from the expected profit by ______ thousand. a $114.77 thousand b $112.52 thousand c $110.31 thousand d $108.15 thousand
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.
| In the table below x denotes the X-Tract Company’s projected annual profit (in $1,000). The table also shows the probability of earning that profit. The negative value indicates a loss. |
| x | f(x) | x = profit | ||
| -100 | 0.01 | f(x) = probability | ||
| -200 | 0.04 | |||
| 0 | ||||
| 100 | 0.26 | |||
| 200 | 0.54 | |||
| 300 | 0.05 | |||
| 400 | 0.02 |
| 10 | On average, |
| a | $114.77 | thousand |
| b | $112.52 | thousand |
| c | $110.31 | thousand |
| d | $108.15 | thousand |
We need to find the standard deviation of profits.
Let Pn = Probability of state n
Xn = Profit of state n
Probability of 0 profit = 1 - (0.01 + 0.04 + 0.26 + 0.54 + 0.05 + 0.02) = 0.08
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