Comparison Group; Dometilc Stock Data lftraugti 07-3 IUI

Categorv Return:

Above AVg

Category Bilk:


Uomlngitar Category; Largo Bond Njmber of Fund; in Cate$0 ry: 7tt

Volatility Measurements

Standard Deviation Mean

Trailing 3-year ihroush 07-31-PI railing 5-sear Ihrw^h 07-31 01

21.95 Sharpe Ratio 0.04

5.85 Bear Market DeciIs Rank* 7

Modern Portfolio Theory Statistics




57 97

The standard deviation for the Fidelity Magellan Fund is 21.95 percent. When you consider the average stock has a standard deviation of 50 percent, this seems like a low number. The reason for the low standard deviation has to do with the power of diversification, a topic we discuss in the next chapter. The mean is the average return, so, over the last three years, investors in the Magellan Fund earned 5.85 percent per year. Also under the Volatility Measurements section, you will see the Sharpe ratio. The Sharpe ratio is calculated as the risk premium of the asset divided by the standard deviation. As such, it is a measure of return to the level of risk taken (as measured by standard deviation). The "beta" for the Fidelity Magellan Fund is 1.06. We will have more to say about this number—lots more—in the next chapter.

that we will end up within one standard deviation of the average is about 2/3. The probability that we will end up within two standard deviations is about 95 percent. Finally, the probability of being more than three standard deviations away from the average is less than 1 percent. These ranges and the probabilities are illustrated in Figure 12.11.

To see why this is useful, recall from Figure 12.10 that the standard deviation of returns on the large-company stocks is 20.2 percent. The average return is 13.0 percent. So, assuming that the frequency distribution is at least approximately normal, the probability that the return in a given year is in the range of -7.2 to 33.2 percent (13.0 percent plus or minus one standard deviation, 20.2 percent) is about 2/3. This range is

P I Ross et al.: Fundamentals of Corporate Finance, Sixth

Edition, Alternate Edition

V. Risk and Return

12. Some Lessons from

Capital Market History

CHAPTER 12 Some Lessons from Capital Market History

Lessons From The Intelligent Investor

Lessons From The Intelligent Investor

If you're like a lot of people watching the recession unfold, you have likely started to look at your finances under a microscope. Perhaps you have started saving the annual savings rate by people has started to recover a bit.

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