Mean, Variance, Standard Deviation and CorrelationWhile making an investment decision, it is important to assess the risk/return profile of any invest...
Lessons
- Probability - Basic Terminology
- Two Defining Properties of Probability
- Empirical, Subjective and Priori Probability
- State the Probability of an Event as Odds
- Unconditional and Conditional Probabilities
- Multiplication, Addition and Total Probability Rules
- Joint Probability of Two Events
- Probability of Atleast One of the Events Occuring
- Dependent Vs. Independent Events in Probability
- Joint Probability of a Number of Independent Events
- Unconditional Probability Using Total Probability Rule
- Expected Value of Investments
- Calculating Variance and Standard Deviation of Stock Returns
- Conditional Expected Values
- Calculating Covariance and Correlation
- Expected Value of a Portfolio
- Variance and Standard Deviation of a Portfolio
- Bayes’ Theorem
- Multiplication Rule of Counting
- Permutation and Combination Formula
Calculating Variance and Standard Deviation of Stock Returns
We can also calculate the variance and standard deviation of the stock returns. The variance will be calculated as the weighted sum of the square of differences between each outcome and the expected returns.
The standard deviation will be:
Remember that the units of measuring standard deviation are the same as the units of measuring stock returns, in this case percentage (%).
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