Lec 4. CH 11. Return and Risk

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