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.
A project under consideration has an
A. What is the required rate of return?
B. Should the project be accepted?
C. What is the required rate of return on the project if it's beta is 1.90?
D. If the projects beta is 1.90 should the project be accepted?
Introduction:
To calculate the return which is expected by the investors, CAPM or capital asset pricing model is used. Under this model apart from the risk free rate, a risk premium is also expected which is adjusted with the company or the project.
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