Question

Rank the following three stocks by their level of total risk, highest to lowest.

Baker Co. has an average return of 13 percent and standard deviation of 26

percent. The average return and standard deviation of Able Co. are 15 percent and

34 percent; and of Catco Co. are 9 percent and 19 percent." (Cornett, Adair, &

Nofsinger, 2016). Describe the components of the standard deviation formula.

Answer 1

1.

Ranking:

Highest to lowest:

Stock	Standard deviation = Total risk	Rank
Able Co.	34%	1
Baker Co.	26%	2
Catco Co.	19%	3

2.

Component of standard deviation:

Step1:

Calculate the average return of the stock for a period. Each period will have some return by adding all return and dividing it by total number of periods we would get average return.

Step2:

Now, subtract each period return with average return and take square of the result so that no negative value appears at each node or period.

Step3:

Take sum of the squared result and divide it by number of period, that would give a variance.

Step4:

Standard deviation = Variance ^ 0.5 or Square root of variance

Example:

Year	Return X	(Return X - Average return of X)^2
1	11.00%	0.00640%
2	29.00%	2.95840%
3	18.00%	0.38440%
4	-19.00%	9.48640%
5	20.00%	0.67240%
Total	59.00%	13.50800%

Average Return X = Total X /5 = 11.800000%

Average = 59%/5

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Variance X = Total of ((Return X - Average return of X)^2)/n = 2.701600%

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Standard deviation X = Variance X^0.5 = 16.436545%