Investment

Returns
RETURN
A rate of return is the gain or loss on an
A return is the gain or loss of
investment over a specified time a security in a
particular period. as a percentage of
period, expressed
the investments cost.
 Dollar Return

Rate of Return
INVESTMENT RISK
Is related to the probability of earning a low
or negative actual return
WHAT IS A
STAND-ALONE RISK?
the risk associated with a single
operating unit of a company or
asset
EXPECTED RATE OF
RETURN
the rate
For example:
of return expected on a
A single assetthat an investment has a 10%
model states
probabilityof a 100% return and a 90% chance of a 50
% return. The expected return is calculated as:

Expected Return = 10%(100%) + 90%(50%)= 55%

 ILLUSTRATION:
Assume:
Expected Return of
both stocks =15%
Probability of:
X= 0% probability of
negative return
Y= 20% probability of
negative return
Measures of
Variability
WHAT IS A
STANDARD DEVIATION?
measures the volatility of an investments
expected return against the risks
 How to compute
STANDARD DEVIATION
1. Calculate the MEAN
2. Subtract the mean from each data
point
3. Square each difference
4. Calculate the MEAN OF THE
SQUARE
5. Take the square root of Number 4
Data Points:

Mean:
 How to compute
STANDARD DEVIATION
1. Calculate the MEAN
2. Subtract the mean from each data
point
3. Square each difference
4. Calculate the MEAN OF THE
SQUARE
5. Take the square root of Number 4
Step 2
 How to compute
STANDARD DEVIATION
1. Calculate the MEAN
2. Subtract the mean from each data
point
3. Square each difference
4. Calculate the MEAN OF THE
SQUARE
5. Take the square root of Number 4
Step 2 Step 3
 How to compute
STANDARD DEVIATION
1. Calculate the MEAN
2. Subtract the mean from each data
point
3. Square each difference
4. Calculate the MEAN OF THE
SQUARE
5. Take the square root of Number 4
Step 2 Step 3 Step 4
 How to compute
STANDARD DEVIATION
1. Calculate the MEAN
2. Subtract the mean from each data
point
3. Square each difference
4. Calculate the MEAN OF THE
SQUARE
5. Take the square root of Number 4
Step 2 Step 3 Step 4

Step 5
WHAT IS A
COEFFICIENT OF
VARIATION?
ratio of the standard deviation to the
mean
Coefficient of Variation formula: