FIN 420 Week 2 - Module 4 Notes.docx - FIN 420 Week 2...

FIN 420 Week 2 Module 4 Notes
Video 4.1 – Single Asset Risk
Single Asset Risk
 Describe and compute standard deviation as a means to measure total risk of a single asset
Single Asset Standard Deviation
What does standard deviation tell us?
Video 4.2 - Part B Probability Distribution
Interpret a normal probability distribution and z-statistic Interpret a lognormal probability distribution
and the significance of skewness and kurtosis

Normal Probability Distribution
Video 4.3 – Portfolio Risk
Z-statistic
Measures number of standard deviations a data value is from the mean:
 Data value > mean
o z-score positive
 Data value < mean
o z-score negative
Example:
z-score = –2.56, data value is 2.56 standard deviations below the mean
Lognormal Probability Distribution
 Series skewed to left of mean
 50% chance an observation will fall lef of mean
 Assumed by investor whenever analyzing a portfolio’s future value

Skewness
How far actual outcomes deviate from mean
 Positively skewed distribution―median is below mean
 Negatively skewed distribution―median is above mean
 Positive skewness describes a return distribution where frequent small losses and a few extreme
gains are common
 Negative skewness describes a return distribution where frequent small gains and a few extreme
losses.
ARE STOCK RETURNS SKEWED?
Kurtosis
Degree of peak in a probability distribution
• Platykurtic distribution
Less peaked distribution
• Leptokurtic distribution
More peaked distribution

Video 4.3 – Portfolio Risk