Consider the following scenario analysis:- State of Economy Probability Stocks Bonds Recession 0.2 -8% 18% Normal Economy 0.4 16% 9% Boom 0.4 22% 3% Which investment is least risky on the basis of co-efficient of variation (CV)?
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.
Consider the following scenario analysis:-
| State of Economy | Probability | Stocks | Bonds |
| Recession | 0.2 | -8% | 18% |
| Normal Economy | 0.4 | 16% | 9% |
| Boom | 0.4 | 22% | 3% |
Which investment is least risky on the basis of co-efficient of variation (CV)?
Note: mentioned the CV (figure in answer box), which option you think its better for investment
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