Contents
Time Value of Money
Annuities
Perpetuities
Kinds of Interest Rates
Future Value of an Uneven Cash flow
Probability Distribution
Standard Deviation
CAPM
Security Market Line
Bond Valuation
Stock Valuation
Cost of Capital
The Balance Sheet
Capital Budgeting
Hall of Fame
Credit Report
Forex
401K
ETFs
Futures
Inflation
IPOs
Mergers
Online Scams
Calculators
Financial Terms
Scientific Terms
Military Terms
Financial Charts
Unemployment
Fuel Mileage
Sports Finance
Energy Efficiency


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Disclaimer
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Standard Deviation
We can measure risk by using standard
deviation. Higher standard deviation means higher risk.
Here is the example from the probability
distribution page
Probability Distribution - In
Business
Economic Outcome |
Probability |
Return on Investment |
Great |
20% |
25% |
Good |
40% |
15% |
So-So |
30% |
5% |
Really Bad |
10% |
0% |
(Sorry, I don't know how to write sigma and the square
root sign in html, so I can't show you the formula for
Standard Deviation, but you can still plug in your
numbers to the chart below)
Economic Outcome |
Return on Investment |
minus |
ERR - the Expected Rate of
Return |
equals |
answer |
squared |
times |
Probability of the
Economic Outcome |
equals |
Answer |
Great |
25% |
- |
12.5% |
= |
12.5 |
156.25 |
X |
20% |
= |
31.25 |
Good |
15% |
- |
12.5% |
= |
2.5 |
6.25 |
X |
40% |
= |
2.5 |
So-So |
5% |
- |
12.5% |
= |
7.5 |
56.25 |
X |
30% |
= |
16.875 |
Really Bad |
0% |
- |
12.5% |
= |
12.5 |
156.25 |
X |
10% |
= |
15.625 |
|
|
|
|
|
|
|
|
Total |
= |
66.25 |
- So the total is 66.25. This is
called the Variance.
- The square root of 66.25 = 8.139
- So the Standard Deviation is 8.139
About the author
 |
Author: Mark McCracken is a corporate trainer and author living in Higashi Osaka, Japan. He is the author of thousands of online articles as well as the Business English textbook, "25 Business Skills in English".
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Copyright © 1997 - 2009 by
Mark McCracken
, All Rights Reserved |