The returns on the common stock of New Image Products are quite cyclical. In a boom economy, the stock is expected to return 18 percent in comparison to 9 percent in a normal economy and a negative 11 percent in a recessionary period. The probability of a recession is 15 percent while the probability of a boom is 25 percent. What is the standard deviation of the returns on this 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 returns on the common stock of New Image Products are quite cyclical. In a boom economy, the stock is expected to return 18 percent in comparison to 9 percent in a normal economy and a negative 11 percent in a recessionary period. The probability of a recession is 15 percent while the probability of a boom is 25 percent. What is the standard deviation of the returns on this stock?
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