What is a beta coefficient, and how are betas used in risk analysis? Do the expected returns appear to be related to each alternative’s market risk? Is it possible to choose among the alternatives on the basis of the information developed thus far
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.
- Assume that the expected
rates of return and the beta coefficients of the alternatives supplied by an independent analyst are as follows:
|
Security |
Estimated rate of returns |
Beta |
|
Nescom |
5% |
1.5 |
|
Market |
4 |
1 |
|
Pk_Steel |
3.5 |
0.75 |
|
T_Bills |
3 |
0 |
|
Nawab |
1 |
-0.6 |
- What is a beta coefficient, and how are betas used in risk analysis?
- Do the expected returns appear to be related to each alternative’s market risk?
Is it possible to choose among the alternatives on the basis of the information developed thus far?
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