Security A offers an expected rate of return of 12% with a standard deviation of 18%, and security B offers an expected return of 6% with a standard deviation of 25%. Obviously, security B is inferior to security A with respect to both mean return and standard deviation. Assume investors are risk-averse, why would anyone hold security B?
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.
Security A offers an expected
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