Bond Lecture

PORTFOLIO INVESTMENT:  

TECHNICAL ANALYSIS:

RISK AND RETURN

Return:

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Share prices can rise and fall rapidly. Investors must accept that the value of their shares may fluctuate by as much as 50% or more in a year.

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Volatility is the degree of variation of a trading price series over time as measured by the standard deviation of returns.

         1) Passive investing (“buy-and-hold”):

            ?  RΔP(A) = RΔP(B)     

         2) Active investing:

            ?   RΔP(A) > RΔP(B)     

            ?   Risk(A) < Risk(B)     

    Quantitative assessment of income and risk is made by technical analysis with the folowing indicators.

    Dispersion is a statistical term describing the size of the range of values expected for a particular variable. It is often interpreted as a measure of the degree of uncertainty, and thus risk, associated with a particular security or investment portfolio..

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[pic 5] – mean (average) value of return for the whole period;

 r – return for each period of time;

n – number of periods.

Typical objective assessment of expected return and risk is based on the actual data of the previous 5 years for monthly returns values (n=60).

Standard deviation is another commonly used statistic for measuring investment or portfolio's volatility. The lower the standard deviation, the lower the volatility. For example, a stock has a standard deviation of 20.0% with an average return of 10%. An investor should expect the price of the investment to move 20% in either a positive or negative manner away from the average return. In theory, the stock can fluctuate in value from negative 10% to positive 30%.

 Stocks have the highest standard deviation, with bonds having much lower measures.

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Exercise#3. What is the future return and risk?

The Bell curve: Normal law of random variable distribution

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