Determining Expected Return REX(RPi R is the expected return for the asset, Ri is the return for the ith possibility Pi is the probability of that return occurring, n is the total number of possibilities 5-6
5-6 Determining Expected Return R = ( Ri )( Pi ) R is the expected return for the asset, Ri is the return for the ith possibility, Pi is the probability of that return occurring, n is the total number of possibilities. n i=1
Determining standard Deviation(Risk Measure) =V∑(R1-R)2(P1) Standard Deviation, o is a statistical measure of the variability of a distribution around its mean It is the square root of variance. 5-7
5-7 Determining Standard Deviation (Risk Measure) = ( Ri - R ) 2 ( Pi ) Standard Deviation, , is a statistical measure of the variability of a distribution around its mean. It is the square root of variance. n i=1
How to Determine the Expected Return and standard Deviation Stock BW R P.(R)P)(R-R)2P) 15 10 -015 00576 03 20 006 00288 09 40 036 00000 21 20 042 00288 33 10 033 00576 Sum 1.00 090 07728 5-8
5-8 How to Determine the Expected Return and Standard Deviation Stock BW Ri Pi (Ri )(Pi ) (Ri - R ) 2 (Pi ) -.15 .10 -.015 .00576 -.03 .20 -.006 .00288 .09 .40 .036 .00000 .21 .20 .042 .00288 .33 .10 .033 .00576 Sum 1.00 .090 .01728
Determining standard Deviation(Risk Measure) (R;-R)2(P) d=V.01728 a=:1315or13.15% 5-9
5-9 Determining Standard Deviation (Risk Measure) = ( Ri - R ) 2 ( Pi ) = .01728 = .1315 or 13.15% n i=1
Coefficient of variation The ratio of the standard deviation of a distribution to the mean of that distribution It is a measure of relatve risk CV=0/R CV of bw=1315/09=146 5-10
5-10 Coefficient of Variation The ratio of the standard deviation of a distribution to the mean of that distribution. It is a measure of RELATIVE risk. CV = / R CV of BW = .1315 / .09 = 1.46