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Risk and Return: Investment and Portfolio Management
Risk and Return: Investment and Portfolio Management
ACFN 3201
• If there are major differences in the expected rates of return of two or more
investment alternatives — it is necessary to use relative measure of
variability to indicate risk per unit of expected return.
•
• Coefficient of variation (CV), is widely used as a relative measure of risk :
Example 2
(k i k ) P(k i )
i 1deviation on ElCat common stock. the
Compute the standard
mean (k) was previously computed as 10.5%
State of Economy Probability Return
Economic Downturn .10 x ( –5% – 10.5%)2 = 24.025%2
Zero Growth .20 x ( 5% – 10.5%)2 = 6.05%2
Moderate Growth .40 x ( 10% – 10.5%)2 = 0.10%2
High Growth .30 x ( 20% – 10.5%)2 = 27.075%2
2 = 57.25%2
Higher
Higherstandard
standarddeviation,
deviation,higher
higherrisk
risk = 57.25%2
= 7.57%
End of the Unit