You have been given this probability distribution for the holding-period return for a stock: Stock of the Economy Probability HPR Boom 0.40 0.35 0.25 22 % Normal growth 11 % Recession – 9 % What is the expected variance for the stock? A) 142.07% B) 189.96% C) 177.04% D) 128.17% E) None of the options are correct. Please provide justification
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 have been given this probability distribution for the holding-period return for a stock:
|
Stock of the Economy |
Probability
|
HPR | |||||
|
Boom |
0.40
0.35
0.25 |
|
|
22 |
% |
||
|
Normal growth |
|
|
11 |
% |
|||
|
Recession |
|
– |
9 |
% |
|||
|
|
What is the expected variance for the stock?
A) 142.07%
B) 189.96%
C) 177.04%
D) 128.17%
E) None of the options are correct.
Please provide justification
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