Lecture 33 - 172 Business Finance (ACC501) Lesson 33 Review...

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Unformatted text preview: 172 Business Finance (ACC501) Lesson 33 Review of the Previous Lecture • Returns – Income Earned – Capital Gains – Percentage Returns • Variability of Returns Topics under Discussion • Variability of Returns (Cont.) • Expected Return • Expected Risk • Portfolio Variability of Returns • In general, the variance for T historical returns is : Var(R) = [(R 1- R) 2 +……+(R T- R) 2 ] / (T -1) • The standard deviation is always the square root of the variance. Year Company X Return Company Y Return 2000 -.20 .05 2001 .50 .09 2002 .30 -.12 2003 .10 .20 • What are the average returns? variances? Standard deviations? • Which investment was more volatile • Company X average returns, R x = (-.20 + .50 + .30 + .10)/4 = .175 • Company Y average returns, R Y = (.05 + .09 - .12 + .20)/4 = .055 • Now we calculate variance for Company X Year Actual Return Average Return Deviation from the Mean Squared Deviation 2000 -.20 .175 -.375 .140625 2001 .50 .175 .325 .105625 2002 .30 .175 .125 .015625 2003 .10 .175 -.075 .005625 Totals .70 .000 .267500 173 • Summarizing the calculations: Company X Company Y Variance ( σ 2) .2675/3 = .0892 .0529/3 = .0176 Standard Deviation ( σ ) √ .0892 = .2987 √ .0176 = .1327 • Standard deviation for company X, 29.87% more than twice Company Y’s 13.27%. This indicates that company X is more volatile investment. Expected Return • Consider a single period of time, say a year. We have two stocks, L and U. and they are expected to have a return of 25% and 20% respectively in the coming year • Why to invest and hold stock U?...
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This note was uploaded on 08/04/2011 for the course ACCT 501 taught by Professor Na during the Spring '11 term at Virtual University of Pakistan.

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Lecture 33 - 172 Business Finance (ACC501) Lesson 33 Review...

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