10 18 Average Stock Returns and Risk Free Returns US government securities have

# 10 18 average stock returns and risk free returns us

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10-18
10-19 The Risk-Return Tradeof The general rule: The more volatile (or risky) a return is, the greater the return will be expected to be.
10-20 Risk Statistics There is no universally agreed-upon definition of risk. The measures of risk that we discuss are variance and standard deviation. Variance and standard deviation measure the dispersion of actual returns around the security’s mean return The standard deviation is the standard statistical measure of the spread of a sample, and it is the measure used in most cases. Its interpretation is facilitated by a discussion of the normal distribution.
10-21 Normal Distribution A large enough sample drawn from a normal distribution looks like a bell-shaped curve. Probability Return on large company common stocks 99.74% – 3 – 48.8% – 2 – 28.6% – 1 – 8.4% 0 11.8% + 1 32.0% + 2 52.2% + 3 72.4% The probability that a yearly return will fall within 20.2 percent of the mean of 11.8 percent will be approximately 2/3. 68.26% 95.44%
Normal DistributionThe return of large company stocks has a standard deviation of 20.2 from 1926 through 2012.That standard deviation can be interpreted as follows:
10-23 Variance and Standard Deviation 23
EXAMPLE – RETURN AND VARIANCE Year Actual Return Average Return Deviation from the Mean Squared Deviation 1 .15 .105 .045 .002025 2 .09 .105 -.015 .000225 3 .06 .105 -.045 .002025 4 .12 .105 .015 .000225 Totals .00 .0045 Variance = .0045 / (4-1) = .0015 Standard Deviation = .03873 10-24 Average Return = (15 + 9 + 6 + 12) / 4 = 10.5