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E-Problems BBA

1) Standard deviation measures how returns vary from the expected return, calculated by taking the square root of the variance. It illustrates how to calculate expected return and standard deviation for a stock with given returns and probabilities. 2) It provides an example to calculate expected return of 7.072% and standard deviation of 5.903% for a stock with no dividends and possible sale prices at the end of the year. 3) For equity shares of Wipro Ltd over 6 years, it calculates the expected return as 15%, variance as 102.33, and standard deviation as 10.11%.

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Pridhvi Raj Reddy
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462 views

E-Problems BBA

1) Standard deviation measures how returns vary from the expected return, calculated by taking the square root of the variance. It illustrates how to calculate expected return and standard deviation for a stock with given returns and probabilities. 2) It provides an example to calculate expected return of 7.072% and standard deviation of 5.903% for a stock with no dividends and possible sale prices at the end of the year. 3) For equity shares of Wipro Ltd over 6 years, it calculates the expected return as 15%, variance as 102.33, and standard deviation as 10.11%.

Uploaded by

Pridhvi Raj Reddy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Measure of Risk:

1) Standard Deviation:
It is the measure of the values of the variables around its mean
(or) it is the square root of the sum of the squared deviations
from the mean divided by the no. of observations.
Standard Deviation, σ = √ ∑ ¿
Where, R= Possible Returns
Ŕ = Expected Return
P= probability
Illustration-1:
Calculate the expected return and the Standard Deviation of return
for a stock having the following probability of returns.
Possible Returns(in percent) (R) Probability of Occurrence (P)
-25 0.05
-10 0.10
0 0.10
15 0.15
20 0.25
30 0.20
35 0.15
Solution:
Calculation of Expected Return:
n

Expected Return ( Ŕ ¿ = ∑ Pi Ri
i=o

Possible Returns(R ) Probability(P ) Product (PiRi


-25 0.05 -1.25
-10 0.10 -1
0 0.10 0
15 0.15 2.25
20 0.25 5
30 0.20 6
35 0.15 5.25

Expected Return( Ŕ ¿ = 16.25 %

Calculation of Standard Deviation of Return:


Possible Probability(P) R−Ŕ ¿ ¿
Returns(R)
-25 0.05 -41.25 1,701.56 85.07
-10 0.10 -26.25 689.0 68.9
0 0.10 -16.25 264.06 26.40
15 0.15 -1.25 1.56 0.23
20 0.25 3.75 14.06 3.51
30 0.20 13.75 189.06 37.81
35 0.15 18.75 351.56 52.73
∑ ¿ = 274.665

S.D = √274.665 = 16.573%


Assignment Problem:
The possible returns and associated probabilities of Securities X and
Y are given below.
Security X Security Y
Probability Return(%) Probability Return(%)
0.05 6 0.10 5
0.15 10 0.20 8
0.40 15 0.30 12
0.25 18 0.25 15
0.10 20 0.10 18
0.05 24 0.05 20

Calculate the expected Return and Standard Deviation of securities


X and Y.
Answers:
Expected Return for Security X = 15.5%
S .D for X = 4.04%
Expected Return for Security Y = 12 .2%
S .D for Y = 4.13%
2) A stock costing Rs.120 pays no dividend. The possible prices
that the stock might sell at the end of the year with the
respective probabilities as follows.
Price Probability
115 0.1
120 0.1
125 0.2
130 0.3
135 0.2
140 0.1
1. Calculate Expected Return.
2. Calculate the Standard deviation of returns.
Solution:
D P1 – P0
Probable Returns(R) = PO + PO

Possible P0 P1 –P0 P 1−P 0


*
prices P0
100(Returns)
115 120 -5 -4.16
120 120 0 0
125 120 5 4.16
130 120 10 8.3
135 120 15 12.5
140 120 20 16.66
Calculation of Expected Return:
Probable Return Probability Pi Ri
-4.16 0.1 -0.416
0 0.1 0
4.16 0.2 0.832
8.3 0.3 2.49
12.5 0.2 2.5
16.66 0.1 1.666
Expected Return( R̈) = 7.072

Possible Probability(P) R−Ŕ ¿ ¿


Returns(R)
-4.16 0.1 -11.232 126.15 12.615
0 0.1 -7.072 50.01 5.001
4.16 0.2 -2.912 8.47 1.694
8.33 0.3 1.228 1.507 0.452
12.50 0.2 5.428 29.46 5.892
16.66 0.1 9.588 91.92 9.192
∑ ¿ = 34.846

S.D = √34.846 = 5.903%


Problem:
The rate of return of equity shares of Wipro Ltd., for past six years
are given below:
Year 1 2 3 4 5 6
Rate of 12 18 -6 20 22 24
return(%)
Calculate Expected return, standard deviation and variance.
Solution:
Expected Return ( Ŕ) = ∑R/N = 12+18-6+20+22+24/6 = 15%
Variance(σ 2) = ∑ ¿/N
Standard Deviation(σ) = √ ∑ ¿
Calculation of Standard Deviation:
Year Rate of (R- Ŕ) (R- Ŕ)2
Return(R)
1 12 -3 9
2 18 3 9
3 -6 -21 441
4 20 5 25
5 22 7 49
6 24 9 81
∑ ¿ = 614/6 = 102.33

Variance(σ 2) = ∑ ¿/N = 102.33


S.D(σ) = √102.33 = 10.11
Assignment Problems:
1) Mr.Sumit invested in equity shares of Wipro Ltd.,its anticipated
returns and associated probabilities are given below.
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 the expected return and
risk in terms of Standard deviation.
2) Stocks L & M have yielded the following returns for the past two
years.
Return(%)
Years L stock M stock
2011 12 14
2012 18 12

Calculate Expected rate of return, Variance and Standard


deviation.

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