ECO220Y1 Lecture Notes - Lecture 4: Standard Deviation
ECO220
Lecture 4
May 16, 2018
1
Recall: Chapters 1 – 5
Example 1:
Average return
Standard deviation
Stock 1
5%
0.5%
Stock 2
5%
0.9%
Since stocks 1 and 2 have the same average return, and stock 1 varies less than stock 2. We
consider stock 2 to be more risky than stock 1.
Example 2:
Average return
Standard deviation
Stock 1
3%
0.5%
Stock 2
5%
0.8%
Since the average returns are different, to compare the risk, we calculate standard deviation per
1% return.
ie. Stock 1
Stock 2
Define: Coefficient of Variation = CV =
CV for population =
CV for sample =
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Since stocks 1 and 2 have the same average return, and stock 1 varies less than stock 2. We consider stock 2 to be more risky than stock 1. Since the average returns are different, to compare the risk, we calculate standard deviation per. 1% return. (cid:2868). (cid:2871)% =(cid:882). (cid:883)(cid:889) ie. stock 1 (cid:4666)(cid:2868). (cid:2873)%(cid:4667) (cid:2868). (cid:2873)% =(cid:882). (cid:883)(cid:888) Define: coefficient of variation = cv =(cid:3041)(cid:3031)(cid:3031) (cid:3031)(cid:3032)(cid:3042)(cid:3041) In previous chapters, we describe the population and/or sample using one variable at a time. In this population, we can calculate the following: Define a measure called covariance and correlation cov(x, y) = (xi - x)(yi - y) Y = standard deviation of y: result is a 2nd order value. It is a squared measure (multiplying two variables together - x and y) Correlation coefficient between x and y = p = (cid:3030)(cid:3042)(cid:4666)(cid:3051),(cid:3052)(cid:4667)
