1) What is the relationship between the market risk of a stock and its expected return?...

1) What is the relationship between the market risk of a stock and its expected return?

2) What is the CAPM? What does it tell you?

3) What is the difference between beta and standard deviation?

Solutions

Expert Solution

1) Expected return is directly related to the market risk . Market risk is represented by beta. Higher the beta mire will be the expected return and lower the beta lower is the expected return.

2)

CAPM model helps to identify the required rate of a project or a company.. This helps in identifying the discount rate for calculating intrinsic value of firm. Here Capm required rate is dependent on Beta , market risk premium and risk free rate.

Proxy for risk free rate is T-bill rate of return for less than 1 years
Proxy of market return is the S&P 500 returns for past 1 year.

It tells us the relationship between market return and expected Returns.

3) Beta is the measure of market risk and systematic risk. It is calculated by the covariance of returns with market divided by variance of market returns.
Standard deviation measure overall standalone risk of a firm. it is calculated by the square root of sum o squares of deviation of returns from the means

jeff jeffy answered 1 year ago

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