The Brownian Motion is used to model the liquid assets (i.e. "cash") of our startup company Math Finance Inc. You are our company's CFO (Chief Financial Officer). The initial value of our assets is 5 (measured in tens of thousands of dollars). The drift and volatility for the first two years turns out to be 2 and 3 respectively. During the next two years, the drift and volatility was observed to be 3 and 4 respectively. What can you say about the probabilistic behavior of our assets at the end of year four? Give proper mathematic explanation. What is the probability that our assets will be worth at least $150,000?
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.
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The Brownian Motion is used to model the liquid assets (i.e. "cash") of our startup company Math Finance Inc. You are our company's CFO (Chief Financial Officer). The initial value of our assets is 5 (measured in tens of thousands of dollars). The drift and volatility for the first two years turns out to be 2 and 3 respectively. During the next two years, the drift and volatility was observed to be 3 and 4 respectively. What can you say about the probabilistic behavior of our assets at the end of year four? Give proper mathematic explanation. What is the probability that our assets will be worth at least $150,000?
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