Expected return and standard deviation are two statistical measures that can be used to analyze a portfolio. The expected return of a portfolio is the anticipated amount of returns that a portfolio may generate, whereas the standard deviation of a portfolio measures the amount that the returns deviate from its mean.

What is standard deviation of stock returns?

Standard deviation is the statistical measure of market volatility, measuring how widely prices are dispersed from the average price. If prices trade in a narrow trading range, the standard deviation will return a low value that indicates low volatility.

What is a good standard deviation for stock?

When stocks are following a normal distribution pattern, their individual values will place either one standard deviation below or above the mean at least 68% of the time. A stock’s value will fall within two standard deviations, above or below, at least 95% of the time.

What does the standard deviation of a stock mean?

In a literal sense, the standard deviation is a measure of how far from the expected value the actual outcome might be. Two stocks may have the same expected return, but have different levels of risk, as measured by variance and standard deviation.

What is the expected return of a stock?

Using the formula from the previous section on expected return, you can easily see that the expected return is 5 percent for stock A (half, or .5, of 7 percent, plus half of 3 percent is 5 percent). Stock B would have a much better return of 15 percent in a “Good” outcome, but lose 5 percent in a “Bad” outcome.

How are expected returns and standard deviations calculated?

Then, add this value to 2 multiplied by the weight of the first asset and second asset multiplied by the covariance of the returns between the first and second assets. Finally, take the square root of that value, and the portfolio standard deviation is calculated. Expected return is not absolute, as it is a projection and not a realized return.

How is the standard deviation of a portfolio calculated?

Conversely, the standard deviation of a portfolio measures how much the investment returns deviate from the mean of the probability distribution of investments. The standard deviation of a two-asset portfolio is calculated as: σ P = √ ( w A2 * σ A2 + w B2 * σ B2 + 2 * w A * w B * σ A * σ B * ρ AB )