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shonini (60)
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1. Individual Securities

Expected return: The return that an individual expects a stock to earn over the next period. Only and expectation. An individual's expectation may simply be the average return per period a security has earned in the past.


Variance and standard deviation: The volatility of a security's return.


Covariance and correlation: Returns on individual securities are relate to one another. The relationship between two securities. 


*Note!!! Correlation is a translated version of covariance. The two parameters always have the same sign (positive, negative, or 0) 



2. Expected Return, Variance, and Covariance and Correlation

 

Stock Fund 

Bond Fund 

Scenario 

Rate of Return 

Squared Deviation 

Rate of Return 

Squared Deviation 

 Recession

 -7%

0.0324

 17%

0.0100 

Normal 

12% 

0.0001 

7% 

0.0000 

Boom 

28% 

0.0289 

-3% 

0.0100 

Expected return 

11.00% 

 

7.00% 

 

Variance 

0.0205 

 

0.0067 

 

Standard Deviation 

14.3% 

 

 

 







Scenario 

Stock Deviation 

Bond Deviation 

Product of Deviation 

 

 

 

 

 Recession

-.18 

.10

-.0180 

Normal 

0.1

0

.0000 

Boom 

.17

-.10

-.0170 

Sum 

 

 

 -.035

Covariance 

 

 

 -.0117


Correlation


     =>  Strong negative

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