MEASUREMENTS OF RISK <ul><li>Standard deviation </li></ul><ul><li>Coefficient of variation (CV) </li></ul><ul><li>Beta </li></ul>
STANDARD DEVIATION <ul><li>It is a measure of the dispersion of possible outcomes. The wider the dispersion, the higher the standard deviation. </li></ul><ul><li>Standard deviation is used by investors as a gauge for the amount of expected volatility. </li></ul>
STANDARD DEVIATION The graph below shows different types of SD with different spreads. The blue curve has the widest spread and, therefore the highest SD and the widest range of possible outcomes. The red curve, however has the lowest SD and fewer possible outcomes. Risk avers investors prefer lower SD as it is easier to anticipate the possible outcomes. The higher the SD, the higher the risk
COEFFICIENT OF VARIATION <ul><li>It is a statistical measure of the dispersion of data points in a data series around the mean. </li></ul><ul><li>The lower the CV, the lower the relative degree of risk. </li></ul>
COEFFICIENT OF VARIATION <ul><li>It allows you to determine how much volatility (risk) you are assuming in comparison to the amount of return you can expect from your investment. </li></ul>
BETA <ul><li>It is a measure of systematic risk (risk that can be reduced through diversification), of a security or a portfolio in comparison to the market as a whole. </li></ul>
BETA <ul><li>Beta is used in the capital asset pricing model (CAPM). This model calculates the expected return of an asset based on its beta and expected market returns </li></ul>
BETA <ul><li>A beta of 1 indicates that the security's price will move with the market. The market has a beta of 1.0. A beta of less than 1 means that the security will be less volatile, less responsive than the market. A beta of greater than 1 indicates that the security's price will be more volatile, more responsive than the market. </li></ul>
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