Investor Bill Johnston is interested in the stock of Designs Unlimited. There is 7 percent probability of a slower than normal economy, 22 percent probability of a normal economy, 46 percent probability of a better than average economy, and 25 percent probability of a fast growing economy. A stock has returns of −20.9 percent, 4.5 percent, 12.3 percent and 28 percent in these states of the economy, respectively. What is the stock's expected return?
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.
Investor Bill Johnston is interested in the stock of Designs Unlimited. There is 7 percent probability of a slower than normal economy, 22 percent probability of a normal economy, 46 percent probability of a better than average economy, and 25 percent probability of a fast growing economy. A stock has returns of −20.9 percent, 4.5 percent, 12.3 percent and 28 percent in these states of the economy, respectively. What is the stock's expected return?
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
