Variance and Holding Stock

Topic 

Variance and Holding Stock

Instructions 

1. Describe how variance and standard deviation are used to measure the variability of individual stocks.
2. Explain how an investor chooses the best portfolio of stock to hold.
3. Discuss how diversification is used to mitigate risk in the portfolio.
4. Describe the relationship between risk and expected return (CAPM).

Answer Preview 

Variance is the measure of how a value varies from the mean. In stock valuation, this forms one of the measurements of how individual stock values differ from the mean value of the stock. It shows how volatile (risky) an investment is. The variance of a portfolio’s return is a function of the variance of the component assets as well as the covariance between each of them. On the other hand, the standard deviation is a measure of volatility for the historical values of the stock.

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