Key Terms Standard deviation
6.4a The Standard Deviation as a Measure of Risk
Standard deviation
FIGURE 6.2 Distribution of Two Stocks
6.4c The Capital Asset Pricing Model and an Investment’s Required Return
Capital asset pricing model (CAPM)
between the expected return on the market and the risk-free rate. Thus,
Assume you are analyzing a risk-adjusted required return for a stock. You have determined the risk-free rate is 4.55%. The expected market return is 12%.
What does this tell you about the stock?
The standard deviation measures an asset’s expected return.
To measure risk, the capital asset pricing model uses:
