Using all the appropriate measures advice Mrs. Teresa on the best farming business to venture in. Give a well detailed justification for your answer
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.
Mrs. Teresa is interested in starting a farming business. She is considering venturing into either strawberry farming or onion farming. She has consulted a financial advisor who established probable returns for these two types of farming businesses and the probability of occurring depending on different weather conditions. This information is as shown below:
| weather conditions | probability for the weather conditions | Return for strawberry farming (in %) | Return for onion farming (in %) |
| Sunny and dry | 0.3 | 3% | -5% |
| Low rainfall | 0.2 | 8% | 8% |
| Moderate rainfall | 0.3 | 15% | 25% |
| High rainfall | 0.1 | 12% | 15% |
| Flooding | 0.1 | -10% | -4% |
Required:
Using all the appropriate measures advice Mrs. Teresa on the best farming business to venture in. Give a well detailed justification for your answer
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