mathematics

You need to find Alice 3 stocks to invest in from different segments of the market. The stocks should come from 3 varied sectors of the market: automotive, drug, and retail. Once you have identified the 3 stocks, you need to find the current yield of the 10-year treasury bond and calculate the required rate of return for each of them. Show all of your work so that you can explain to Alice how risk affects your expectations. Alice wants to earn 15% in the market despite the markets risks.

 

Expectation of return on stock is directly proportional to the risk inherited to that stock. Accepting higher risk always demand higher return. Stock are categorized as aggressive or defensive defensive one as beta is more than one or less than one respectively. CAPM model gives an approx value of expected return on a stock. It is a linear relation between expected return and beta of stock