Page 82 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Unit 2: Risk and Return

Notes
Calculation Mean Return and Standard Deviation of Security of Infosys (Security B)
2
Year Return % (RB) (R – R ) (R – R )
B B B B
2001 10 2 (10 – 8) 4
2002 -6 –14 (–6 – 8) 196
2003 12 4 (12– 8) 16
2004 9 1 (9 – 8) 1
2005 15 7 (15 – 8) 49
40 266

Mean Return ( R ) = 40/5 = 8%
B
Standard Deviation ( ) = 266 = 16.31%
B
Analysis – Security A has a higher historic level of return and lower risk as compared to
Security B. Correlation Coefficient ( ).
AB
N XY ( X)( Y)
=
N X 2 ( X) 2 N Y 2 Y 2

A’s return (%) B’s return (%)
X X Y Y XY
2
2
9 81 10 100 90
5 25 -6 36 -30
3 9 12 144 36
12 144 9 81 108
16 256 15 225 240
2
2
X= 45 X = 515 Y = 40 Y = 586 XY = 444

5 444 (45 40)
=
5 515 (45) 2 5 586 (40) 2
2,220 1800 420
= =
2575 2025 2930 1600 550 1330

420 420
= = = 0.491
23.452×36.469 855.271
Verification:
Calculation of Covariance of Returns of Securities A and B
Year Returns (%)
(R – R ) (R – R B ) (R – R ) × (R – R )
B
RA RB A A B A A B
2001 9 10 0(9 – 9) 2 (10 – 8) 0 (0 × 2)
2002 5 -6 -4 (5 – 9) -14 (-6 – 8) 56 (-4 × -14)
2003 3 12 -6 (3 – 9) 4 (12 – 8) -24 (-6 × 4)
2004 12 9 3 (12 – 9) 1 (9 – 8) 3 (3 × 1)
2005 16 15 7 (16 – 9) 7 (15 – 8) 49 (7 × 7)
CovAB = 84

Contd...

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