The possible returns from investing in BestMax share are as follows: State of economy Probability of state of economy Return if state occurs Strong 0.26 96% Normal 0.51 12% Weak 0.23 -83% Based on the above information, calculate the following for BestMax shares: a. Standard deviation of return b. Coefficient of variation c. What does the coefficient of variation reveal about an investment's risk that the standard deviation does not? Explain.
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.
The possible
| State of economy | Probability of state of economy | Return if state occurs |
| Strong | 0.26 | 96% |
| Normal | 0.51 | 12% |
| Weak | 0.23 | -83% |
Based on the above information, calculate the following for BestMax shares:
a. Standard deviation of return
b. Coefficient of variation
c. What does the coefficient of variation reveal about an investment's risk that the standard deviation does not? Explain.
d. What is 'risk' in the context of financial decision making? Explain.
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