Using the single factor model for firm with a Beta of 1 and when the standard deviation of the market is .3. A) What can we say about the standard deviation of this firm’s stock? B) If a new firm Gexco has a Beta of 2 and has a standard deviation of 0.65, what is this Gexco’s firm specific risk? C) Use the known information to find the ratio of explained to total variance, also known as R-squared. Explain what R-square means using words such as systematic and firm specific risk. D) If Gexco’s expected return is 20% and the markets expected return is 12% and the risk free rate is 5%, come up with an estimate of Alpha. Explain and show how a tracking portfolio could be used and what would result. Is the possible gain risk free?
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.
- Using the single factor model for firm with a Beta of 1 and when the standard deviation of the market is .3.
A) What can we say about the standard deviation of this firm’s stock?
B) If a new firm Gexco has a Beta of 2 and has a standard deviation of 0.65, what is this Gexco’s firm specific risk?
C) Use the known information to find the ratio of explained to total variance, also known as R-squared. Explain what R-square means using words such as systematic and firm specific risk.
D) If Gexco’s expected return is 20% and the markets expected return is 12% and the risk free rate is 5%, come up with an estimate of Alpha. Explain and show how a tracking portfolio could be used and what would result. Is the possible gain risk free?
2).Write out the CAPM Model and explain each part.
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