Suppose we observe from market data that, for a given non-dividend paying stock, See Image What might explain the inequality in this relationship, is markets are efficient or does result in arbitrage opportunities?
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 we observe from market data that, for a given non-dividend paying stock, See Image
What might explain the inequality in this relationship, is
Forward price (F0) is the price of forward contract at which buyer and seller of the contract agreed to exchange the underlying asset at a predetermined date in future.
Spot Price (S0) is the price at which immediate buying and selling of the underlying asset takes place.
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