Page 87 - DCOM507_STOCK_MARKET_OPERATIONS

Stock Market Operations

Notes Calculate the average rate of return, standard deviation and variance.
Solution:
Calculation of Average rate of Return

+
− +
+
Σ R 12 18 6 20 22 24
+
R = N = 6 = 15%
Σ (R R) 2
−
σ 2 = N
Years and Respective Rate of Return

Year Rate of Return (%) (R – R) (R – R)
2
2001 12 -3 9
2002 18 3 9
2003 -6 -21 441
2004 20 5 25
2005 22 7 43
2006 24 9 81
2
Σ(R – R) 614

614
Variance ( 2 ) = = 102.33
σ 6

2
= σ = Variance = 102.33
= 10.12%

Example: Mr. RKV invested in equity shares of Wipro Ltd., its anticipated returns and
associated probabilities are given below:

Anticipated Returns and Associated Probabilities in Equity Shares of Wipro Ltd.

Return % -15 -10 5 10 15 20 30

Probability 0.05 0.10 0.15 0.25 0.30 0.10 0.05

You are required to calculate the expected rate of return and risk in terms of standard deviation.
Solution:
Calculation of expected return and risk in terms of standard deviation.

Expected Return and Risk

Return (R) Probability (P) (P × R) 2 2
( R– R) ( R– R) ( R– R) × P
-15 0.05 - 0.75 -5.5 30.25 1.5125
-10 0.10 -1.0 -0.5 0.25 0.0250

Contd...

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