(Related to Checkpoint 7.1) (Expected rate of return and risk) B. J. Gautney Enterprises is evaluating a security. One-year Treasury bills are currently paying 5.2 percent. Calculate the investment's expected return and its standard deviation. Should Gautney inves in this security? Probability Return 0.05 -4% 0.40 3% 0.50 6% 0.05 9% (Click on the icono in order to copy its contents into a spreadsheet.)
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.
Please find the following:
The investment's expected return as a percentage:
The investment's standard deviation:
Given:
| Probability(P) | Return |
| 0.05 | -4% |
| 0.4 | 3% |
| 0.5 | 6% |
| 0.05 | 9% |
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