Risk Return
Risk Return
30
21.84
To tal Return (%)
20 15.65
12.83
10.81
10 2.93
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
-10 -6.73
-20 -16.43
-30 -27.45
-40
Ye ar
Average Rate of Return
•Risk means you have the possibility of losing some or even all of
your original investment.
n 2
1
Variance 2
n 1 t 1
Rt R
7
• The expected rate of return [E (R)] is the sum of the product of each outcome
(return) and its associated probability: Risk & Return.xlsx
Expected Return : Incorporating
8 Probabilities in Estimates
• The following formula can be used to
calculate the variance of returns:
Expected Return : Incorporating
Probabilities in Estimates
Beta of 0 - Basically, cash has a beta of 0. In other words, regardless of which way the market
moves, the value of cash remains unchanged (given no inflation).
Beta between 0 and 1 - Companies with volatilities lower than the market have a beta of less
than 1 (but more than 0). As we mentioned earlier, many utilities fall in this range.
Beta of 1 - A beta of 1 represents the volatility of the given index used to represent the overall
market, against which other stocks and their betas are measured. The S&P 500 is such an index. If
a stock has a beta of one, it will move the same amount and direction as the index. So, an index
fund that mirrors the S&P 500 will have a beta close to 1.
Beta greater than 1 - This denotes a volatility that is greater than the broad-based index. Again,
as we mentioned above, many technology companies on the Nasdaq have a beta higher than 1.
Beta greater than 100 - This is impossible, as it essentially denotes a volatility that is 100 times
greater than the market. If a stock had a beta of 100, it would be expected to go to 0 on any
decline in the stock market. If you ever see a beta of over 100 on a research site it is usually the
result of a statistical error, or the given stock has experienced large swings due to low liquidity,
such as an over-the-counter stock. For the most part, stocks of well-known companies rarely ever
have a beta higher than 4.
Factor beta