Risk and Return

Mean or Average
Arithmetic Mean

Yearly Yield Number of

Mean Summation Value or Specific Years or
Sign Period Yield Number of
Value Periods
Arithmetic Mean
Arithmetic Mean
Arithmetic Mean
 -
0.25

Yield (Y) = (Ending value / Beginning Value) -1

Year 2019 Yield = (250/200) -1
Yield = 1.25 -1
Yield = 0.25
 -
0.25
-0.16

Yield (Y) = (Ending value / Beginning Value) -1

Year 2020 Yield = (210/250) -1
Yield = 0.84 -1
Yield = -0.16
 -
0.25
-0.16
0.28

Yield (Y) = (Ending value / Beginning Value) -1

Year 2021 Yield = (270/210) -1
Yield = 1.28 -1
Yield = 0.28
 -
0.25
-0.16
0.28
∑Y = 0.37

Arithmetic Mean
 -
0.25
-0.16
0.28

n = number of years of which yield is calculated

MEAN = 𝐘 n=3
= ΣY/n
= 0.37/3
= 0.12 or = 12%
12
 VARIANCE
Variance

Variance

Number of
Summation
Years or
Sign Yearly Yield
Number of
Value or Specific
Mean Periods
Period Yield
Value
 14

Variance
 15

0.13 0.0169

= 0.25 – 0.12 = (0.13)2

Year 2019
= 0.13 = 0.0169
 16

0.13 0.0169
-0.28 0.0784

= -0.16 – 0.12 = (-0.28)2

Year 2020
= -0.28 = 0.0784
 17

0.13 0.0169
-0.28 0.0784
0.16 0.0256

= 0.28 – 0.12 = (0.16)2

Year 2021
= 0.16 = 0.0256
 18

0.13
-0.28
0.16

= ∑(Y-)2/n
= 0.1209/3
= 0.0403
 19

= ∑(Y-)2/n
Interpretation of Variance = In
= 0.1209/3
terms of variance, the risk
= 0.0403
related to yield of “Beta
Corporation” is 0.0403
Standard Deviation 20
 Standard Deviation 21

Variance Standard Deviation

= ∑(Y-)2/n
= 0.1209/3 = ∑(Y-)2/n
= 0.0403 = 0.0403
= 0.20
= 20 %
 Standard Deviation 22

Standard Deviation Interpretation of Variance =

In terms of Standard
Deviation, the risk related to
= ∑(Y-)2/n yield of “Beta Corporation” is
= 0.0403 20%
= 0.20
= 20 %
 23
Co-efficient of Variation (CV)

CV = /
CV = Co-efficient of Variation (CV)
= Standard Deviation
= Mean
 24

Mean Standard Deviation

0.12 20% 0.20

CV = /
CV = 0.20/0.12
CV = 1.66
 25
Co-efficient of Variation (CV)

CV = / Interpretation: The ratio of standard

CV = 0.20/0.12 deviation to mean of Beta Corporation is
CV = 1.66 1.66
26
 COVARIANCE 27

Definition = In mathematics and statistics, covariance is a

measure of the relationship between two variables. It shows
how much – to what extent – the variables change together.
 Covariance or Co-
Movement between X
COVARIANCE Mean of X 28
and Y Summation
Yield of X Yield of Y
Sign

Mean of Y

Number of
Years or
Number of
Periods
 29

Year 2019 = (0.04)(0.12) = 0.0048

 30

Year 2020 = (0.25)(-0.28) = -0.07

 31

Year 2021 = (-0.28)(0.16) = -0.0448

 33

COVx,y = -0.11/3
COVx,y = -0.0366

Interpretation = The degree to which Alpha Corporation Yield

(X) and Beta Corporation Yield (Y) move together is -0.0366
 Correlation Coefficient 34

 Correlationis a statistic that measures the degree to which two

variables move in relation to each other.
 Correlation shows the strength of a relationship between two
variables and is expressed numerically by the correlation
coefficient.
 The correlation coefficient's values range between -1.0 and 1.0.
 Correlation Coefficient 35

 A perfect positive correlation means that the correlation coefficient is

exactly 1. This implies that as one security moves, either up or down,
the other security exactly moves in the same direction.
 A perfect negative correlation means that two assets move in opposite
directions,
 Zero correlation implies no relationship at all.
 Correlation Coefficient 36
Covariance or between X
Correlation Coefficient and Y

Standard Deviation
Standard Deviation
of X
of Y
 Correlation Coefficient
37
COVx,y = -0.0366 0.2179 y = 0.20

r = -0.0366/(0.2179)(0.20)
r = -0.0366/0.0435
r = -0.8413
 Correlation Coefficient
38
COVx,y = -0.0366 0.2179 y = 0.20

r = -0.0366/(0.2179)(0.20) Interpretation = The correlation Co-efficient between

r = -0.0366/0.0435 Alpha Corporation Yield (X) and Beta Corporation Yield
r = -0.8413 (Y) is -0.8413. Since the sign is negative it means
when there is increase in Alpha Corporation Yield (X)
than Yield of Beta Corporation (Y) will decrease