Objective: Calculate returns and riskiness of returns for various assets
Introduction: Standard deviation is a proven mathematical methodology to measure the level of volatility for return on investments. When financial managers compare two funds with identical annualized returns, the fund with a lower standard deviation is typically the most attractive. The most common measure used for fund evaluation is standard deviation.
Step 1: Introduction about Standard Deviation and Risk
Provide a definition and introduction about “standard deviation” and explain how it is used to quantify risk.
The overall written analysis essay should include a minimum of three references cited within the content of the paper and the reference page according to APA guidelines.
Step 2: Standard Deviation 5 Step Procedure
Examine, in order, the five-step procedure for finding the standard deviation. Provide a brief description of each step and its purpose when possible. Review internal course readings and external sites about the standard deviation five-step procedure.
Note: you may find external sites that use more than five steps. It is okay to include and write about more than five standard deviation steps.
Optional: Insertion of an Excel example
Describe and address:
• How to calculate the expected rate of return of the investment
• Why it is best practice to subtract the expected rate of return of 15% from each of the possible rates of return and square the difference?
• Explain the purpose for multiplying the squared differences calculated in step 2 by the probability that those outcomes will occur
• Why it is necessary to sum all the values calculated in step 3 together?• What does the square root of the variance calculated in step 4 describe?
Step 3: Asses and Conclude
• Assess whether it is possible to diversify away the risk inherent in investments
• Assess whether the standard deviation of a portfolio is, or is not, a weighted average of the standard deviations of the assets in the portfolio
• Write a brief summary conclusion of what you have learned about “standard deviation” and how it is used quantify risk