The market and Stock A have the following probability distributions: Probability Return on market Return on Stock A 0.2 18% 16% 0.3 12% 14% 0.5 10% 11% Calculate the expected rates of return for the market and Stock A. Calculate the coefficient of variation for the market and Stock A (Standard deviation for market is 3.0265% and standard deviation for Stock A is 2.0224%).
The market and Stock A have the following probability distributions: Probability Return on market Return on Stock A 0.2 18% 16% 0.3 12% 14% 0.5 10% 11% Calculate the expected rates of return for the market and Stock A. Calculate the coefficient of variation for the market and Stock A (Standard deviation for market is 3.0265% and standard deviation for Stock A is 2.0224%).
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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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.
Question
The market and Stock A have the following probability distributions:
| Probability | Return on market | Return on Stock A |
|
0.2 |
18% | 16% |
| 0.3 | 12% | 14% |
| 0.5 | 10% | 11% |
- Calculate the expected
rates of return for the market and Stock A. - Calculate the coefficient of variation for the market and Stock A
- (Standard deviation for market is 3.0265% and standard deviation for Stock A is 2.0224%).
Expert Solution
Step 1
Data given:
| Probability | Return on Market | Return on Stock A |
| 0.2 | 18% | 16% |
| 0.3 | 12% | 14% |
| 0.5 | 10% | 11% |
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