ou are comparing stock A to stock B. Given the following information, what is the expected return and risk of a portfolio of A and B where you have invested 40% of your wealth in stock A? State of Economy Probability of State of Economy Stock A- (Rate of Return if State Occurs) Stock B- (Rate of Return if State Occurs) Normal 45% 14% 17% Recession 55% -22% -28%
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 comparing stock A to stock B. Given the following information, what is the expected return and risk of a portfolio of A and B where you have invested 40% of your wealth in stock A?
| State of Economy | Probability of State of Economy | Stock A- (Rate of Return if State Occurs) | Stock B- (Rate of Return if State Occurs) |
| Normal | 45% | 14% | 17% |
| Recession | 55% | -22% | -28% |
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