(92)---RISK OF RATES OF RETURN

Risk of Rates of Return

The variability of rates of return may be defined as the extent of the deviations or dispersion of individual rates of return from the average rate of return. There are two measures of this dispersion, variance or standard deviation.

The following steps are involved in calculating variance or standard deviation of rates of return of assets or securities using historical returns,

• Calculate the average rate of return.
• Calculate the deviation of individual rates of return from the average rate of return and square.
• Calculate the sum of the square of the deviations as determined in the preceding step and divide it by the number of periods or observations less one to obtain variance.
• Calculate the square root of the variance to determine the standard deviation.