The following three stocks are available in the market: E(R) β Stock A 10.9 % 1.18 Stock B 12.8 .98 Stock C 15.3 1.38 Market 14.3 1.00 Assume the market model is valid. The return on the market is 15.1 percent and there are no unsystematic surprises in the returns. What is the return on each stock?
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.
The following three stocks are available in the market:
E(R) β
Stock A 10.9 % 1.18
Stock B 12.8 .98
Stock C 15.3 1.38
Market 14.3 1.00
Assume the market model is valid.
The return on the market is 15.1 percent and there are no unsystematic surprises in the returns. What is the return on each stock?
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