You are considering investing in a technology stock but are concerned that the required return may be too low. You will not purchase the stock if the required return is below 13%. Will you purchase the stock given the following information: The expected return on the market is 10%; T-bill rates are 5%; the stock’s β is 1.5.
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.
You are considering investing in a technology stock but are concerned that the required return may be too low. You will not purchase the stock if the required return is below 13%. Will you purchase the stock given the following information: The expected return on the market is 10%; T-bill rates are 5%; the stock’s β is 1.5.
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