ased on the following information, what is the standard deviation of returns? State of Economy Probability of State of Economy Rate of Return if State Occurs Recession .28 − .096 Normal .41 .111 Boom .31 .221

ased on the following information, what is the standard deviation of returns? State of Economy Probability of State of Economy Rate of Return if State Occurs Recession .28 − .096 Normal .41 .111 Boom .31 .221

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 14MC: This calculation determines profitability or growth potential of an investment, expressed as a...

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Concept explainers

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.

Question

Based on the following information, what is the standard deviation of returns?

State of Economy	Probability of State of Economy	Rate of Return if State Occurs
Recession	.28	−	.096
Normal	.41		.111
Boom	.31		.221

Definition Definition Percentage gain or loss from a specific investment over time. The rate of return is the difference between the closing and initial values of an investment divided by the initial value of the investment. The closing value includes any intermediate cash flows such as dividends or interest amounts.

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