You estimate the expected return on a stock to be 10%. The required rate of return on this stock is 12%. The stock has a standard deviation of 25% and a beta of 1.2. Which of the following is correct. Question 10 options: This is a good investment since it is required to return 12% for investors This is a bad investment since the expected return is less than the required return The stock is a bad investment because it has a beta greater than one.
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 estimate the expected return on a stock to be 10%. The required
Question 10 options:
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This is a good investment since it is required to return 12% for investors |
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This is a bad investment since the expected return is less than the required return |
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The stock is a bad investment because it has a beta greater than one. |
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