You have estimated the following probability distributions of expected future returns for Stocks X and Y: Stock X Stock Y Probability Return Probability Return 0.1 -12 % 0.2 4 % 0.1 11 0.2 7 0.3 14 0.3 11 0.3 30 0.2 17 0.2 40 0.1 30 What is the expected rate of return for Stock X? Stock Y? Round your answers to one decimal place. Stock X: % Stock Y: % What is the standard deviation of expected returns for Stock X? For Stock Y? Round your answers to two decimal places. Stock X: % Stock Y: % Which stock would you consider to be riskier? is riskier because it has a standard deviatio
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 estimated the following probability distributions of expected future returns for Stocks X and Y:
| Stock X | Stock Y | ||||||
| Probability | Return | Probability | Return | ||||
| 0.1 | -12 | % | 0.2 | 4 | % | ||
| 0.1 | 11 | 0.2 | 7 | ||||
| 0.3 | 14 | 0.3 | 11 | ||||
| 0.3 | 30 | 0.2 | 17 | ||||
| 0.2 | 40 | 0.1 | 30 |
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What is the expected
rate of return for Stock X? Stock Y? Round your answers to one decimal place.
Stock X: %Stock Y: %
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What is the standard deviation of expected returns for Stock X? For Stock Y? Round your answers to two decimal places.
Stock X: %Stock Y: %
- Which stock would you consider to be riskier?
is riskier because it has a standard deviation of returns.
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