Coursework #3 Case Study Example | Topics and Well Written Essays - 250 words

Coursework #3 - Case Study Example With that stated, the expected return on this portfolio is halfway between the expected returns on the two individual securities; however, the standard deviation is less than halfway between the standard deviations on the two securities. Therefore, unless the investor was very risk averse, meaning he would look at this case, where he might choose to invest only in security A. However, if he were not risk averse he would invest in the portfolio rather than invest in the two securities separately (Gitman, 2009). Standard deviation is defined as the common statistical indicator of an assets risk; it measures the dispersion around the expected value. This is another way that a firms risk and expected return directly affect its share price. Risk and return are the two key determinants of a firms value. It is generally a financial managers responsibility to assess carefully the risk and return of all major decisions. Managers use this to ensure that the expected returns justify the level of risk that someone will introduce (Gitman, 2009. The definition of (CAPM) or capital asset pricing model is the basic theory that links risk and return for all assets. We describe this relationship between the required return, r. The no diversifiable risk of the firm as it is measured by the beta coefficient b. This is important in finance because the model CAPM links non-diversifiable risk and return with all assets. Generally, there are five sections. The first deals with the beta coefficient, which is a measure of the non-diversifiable risk. The second section presents an equation of the model itself. The third section graphically describes the relationship between risk and return. The fourth section discusses the effects of changes in inflationary expectations and risk aversion on the relationship between risk and return and the fifth section offers some comments of the CAPM. The CAPM model in general relies on historical data. The betas