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.
Suppose your expectations regarding the stock price are as follows:
| State of the Market | Probability | Ending Price | HPR (including dividends) |
|||||||||
| Boom | 0.30 | $ | 140 | 53.5 | % | |||||||
| Normal growth | 0.28 | 110 | 17.5 | |||||||||
| Recession | 0.42 | 80 | −12.0 | |||||||||
Use the equations E(r)=Σsp(s)r(s)E(r)=Σsp(s)r(s) and σ2=Σsp(s) [r(s)−E(r)]2σ2=Σsp(s) [r(s)−E(r)]2 to compute the mean and standard deviation of the HPR on stocks. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
![E (r) = Xp (s) r(s) and o? = Ep (s) [r(s) - E(r)]²](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F499a9a79-ce67-42e6-849e-a94d061ff69f%2Faf5d5482-9cb2-4125-b675-8fcb9cb469f2%2Fgiq0rtp_processed.png&w=3840&q=75)
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