Will Power is forecasting risk and return for 2 stocks, Roll and Ross. He predicts that there is a 40% chance that the economy performs poorly, and in that worst-case scenario, Roll will earn a -10% whereas Ross will earn a 21% for the month. He also predicts that there is a 60% chance that the economy will achieve great growth and in this best-case scenario, he expects that Roll will earn a 28% return while Ross will earn 8%. Based on Will’s estimation, calculate the risk and return AND interpret in plain English for a $100,000 portfolio, in which $35,000 invested in Roll and the rest of the investment invested in Ross.
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.
Will Power is
Based on Will’s estimation, calculate the risk and return AND interpret in plain English for a $100,000 portfolio, in which $35,000 invested in Roll and the rest of the investment invested in Ross.
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