We call this the indirect method indirect method r

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Unformatted text preview: le. We call this the "indirect" method. Indirect method r hat = σ= 10% 0.00% Calculation of expected return and standard deviation for F Expected rate of return for F Standard deviation for F Probability of Deviation from Squared Occurrence r hat deviation Rate of Return Product Sq Dev * Prob. 10% 20% 4 0% 20% 10% 100% 6% 8% 10% 12% 14 % 0.60% 1.60% 4 .00% 2.4 0% 1.4 0% Expected Rate of Return, r hat = r hat = Indirect method 10% 10% -4 % -2% 0% 2% 4% 0.16% 0.04 % 0.00% 0.04 % 0.16% S um: Std. Dev. = Square root of sum = σ= 0.02% 0.01% 0.00% 0.01% 0.02% 0.05% 2.19% 2.19% Calculation of expected return and standard deviation for G Expected rate of return for G Standard deviation for G Probability of Deviation from Squared Occurrence Rate of Return Product r hat deviation Sq Dev * Prob. 10% 20% 4 0% 20% 10% 100% 14 % 12% 10% 8% 6% Indirect method 1.4 0% 2.4 0% 4 .00% 1.60% 0.60% Expected Rate of Return, r hat = r hat = 10% 10.00% 4% 2% 0% -2% -4 % 0.16% 0.04 % 0.00% 0.04 % 0.16% S um: Std. Dev. = Square root of sum = σ= 0.02% 0.01% 0.00% 0.01% 0.02% 0.05% 2.19% 2.19% Calculation of expected return and standard deviation for H Expected rate of return for H Standard deviation for H Probability of Deviation from Squared Occurrence Rate of Return Product r hat deviation Sq Dev * Prob. 10% 20% 4 0% 20% 10% 100% 4% 6% 8% 15% 22% Indirect method 0.4 0% 1.20% 3.20% 3.00% 2.20% Expected Rate of Return, r hat = r hat = 10.00% 10.00% -6% -4 % -2% 5% 12% 0.36% 0.16% 0.04 % 0.25% 1.4 4 % S um: Std. Dev. = Square root of sum = σ= 0.04 % 0.03% 0.02% 0.05% 0.14 % 0.28% 5.27% 5.27% COVARIANCE The covariance is a measure that combines the variance of a stock's return with the tendency of those returns to move up or down at the same time another stock moves up or down. To calculate the covariance, there are a few steps. First find the differences of all the possible returns from the expected return; do this for both stocks. Second, multiply the differences of both stocks. Third, mult...
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