Let Ps be the current market price of a share of common stock of Company X. Let P; be the "fundamental" value of a share of common stock of Company X. Let r be the long-run average annual compounded rate of return on common stocks, ånd b be the long-run annual compounded rate of return on corporate bonds. Finally, let ɛ be a random error term. Which of the following equations best characterizes the Efficient Markets Hypothesis? Select one: O a. Ps = Pt + r + E O b. Ps = Pf + ɛ-b c. Ps = (Pf + ɛ) x (r – b) d. Ps = Pf + ɛ
Let Ps be the current market price of a share of common stock of Company X. Let P; be the "fundamental" value of a share of common stock of Company X. Let r be the long-run average annual compounded rate of return on common stocks, ånd b be the long-run annual compounded rate of return on corporate bonds. Finally, let ɛ be a random error term. Which of the following equations best characterizes the Efficient Markets Hypothesis? Select one: O a. Ps = Pt + r + E O b. Ps = Pf + ɛ-b c. Ps = (Pf + ɛ) x (r – b) d. Ps = Pf + ɛ
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 1P
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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.
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