6-3040 2010 STD.DEV&amp;PORT RISK

# 6-3040 2010 STD.DEV&amp;PORT RISK - RISK AND RETURN...

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Unformatted text preview: RISK AND RETURN MEASUREMENT AND ANALYSIS All investments shown below have a mean of 100 Range 100-100 Range 90-110 Range 80-120 Range 50-150 Range 10-190 RISK MEASUREMENT Investment Risk Measures: • Standard deviation • Coefficient of variation • Beta Investment 1 Year Return(%) 1 5 2 15 3 (10) Mean = 45/5 = 9% 4 10 5 25 Sum = 45 Investment 1 Year Return(%) 1 5 2 15 3 (10) Mean = 45/5 = 9% 4 10 5 25 Sum = 45 ( - 4) 2 n ( 5- 9 ) • Compare each possible outcome to the mean Investment 1 Year Return(%) 1 5 2 15 3 (10) Mean = 45/5 = 9% 4 10 5 25 Sum = 45 σ = ( - 4) 2 + ( + 6) 2 + ( - 19) 2 + ( + 1) 2 + ( + 16) 2 ( 25 - 9 ) n Investment 1 Year Return(%) 1 5 2 15 3 (10) Mean = 45/5 = 9% 4 10 5 25 Sum = 45 σ = ( - 4) 2 + ( + 6) 2 + ( - 19) 2 + ( + 1) 2 + ( + 16) 2 670 = 11.6% 5 n RISK MEASUREMENT Returns(%) 1. Year Stock A Stock B 1 23 7 2-17 14 3 8 12 4 14-5 a. By visible inspection, describe the variability in the returns of Stock A as it compares to Stock B RISK MEASUREMENT Returns(%) 1. Year Stock A Stock B 1 23 7 2-17 14 3 8 12 4 14-5 b. Determine the standard deviation of stock A RISK MEASUREMENT Returns(%) 1. Year Stock A Stock B 1 23 7 2-17 14 3 8 12 4 14-5 c. Determine the standard deviation of stock B Two investments are depicted below: A B STD. DEV. 12% 12% Mean 20% 20% These investments have the same relationship between their risk and expected returns. Does their relationship change with the following new information? Two investments are depicted below: A B STD. DEV. 12% 12% Mean 20% 2000% Coefficient of Variation (CV) • The standard deviation only shows variability (risk) • The CV shows the risk of an investment in comparison to its return σ CV = Expected return CV Investment A = 12/20 = 0.60 CV investment B = 12/20 = 0.60 Coefficient of Variation (CV) • The standard deviation only shows variability (risk) • The CV shows the risk of an investment in comparison to its return σ CV = Expected return CV Investment A = 12/20 = 0.60 CV investment B = 12/20 = 0.60 = 12/30 = 0.40 = 12/50 = 0.24 = 12/200 = 0.06 = 12/2000 = 0.01 Standard Deviation Using Probabilities...
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6-3040 2010 STD.DEV&amp;PORT RISK - RISK AND RETURN...

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