STANDARD DEVIATION

Question 1

STANDARD DEVIATION

Answer 1

Measure of Risk and variability of returns
Higher the standard, greater the risk
How much something varies around an average
Can be used to determine TOTAL risk of UNDIVERSIFIED portfolio
Calculate Probability of Returns: 68% - 95% - 99% (+ or - 1, 2, or 3)

Question 2

CALCULATING STANDARD DEVIATION

Answer 2

E+ key and .
Just enter returns (10E+, 13E+, 4 (CHS)E+, etc then press g s

You can also calculate probability of EXPECTED rates of return:
Expected return = 10%, probability of return = 30% (multiply, then add others)

Question 3

COEFFICIENT of VARIATION

Answer 3

Determines which investment has more relative risk when there are different avg returns
—tells probability of actually experiencing a return close to the average
—the higher the coefficient, the more risky per unit of return

CV = Standard Deviation/Average Return

Question 4

DISTRIBUTION OF RETURNS

Answer 4

Normal Distribution—considering range of investment returns

LogNormal Distribution 00 considering a dollar amount or portfolio value