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
Financial Terms
Financial Charts
Energy Efficiency
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Standard DeviationWe 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