Suppose an investor wants to invest either in the common stock of Square Corporation or Beximco Corporation. Square Corporation offers investors an expected rate of return equal to 39%, with a standard deviation of 20%. Square offers a higher expected return than Beximco Corporation (the expected rate of return equals 31%, and the standard deviation equals 18%), but it is also riskier. The variance for Square Corporation is 400, and Bexlmco Corporation is 324. Concerning both risk and return, which corporation has lower risk per unit of return, and which investment would be the better investment? Why? Show calculation and explain with necessary numerical data.
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 an investor wants to invest either in the common stock of Square Corporation or Beximco Corporation. Square Corporation offers investors an expected
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