The Historical Variance and Standard Deviation

The variance essentially measures the average squared difference between the actual returns and the average return. The bigger this number is, the more the actual returns tend to differ from the average return. Also, the larger the variance or standard deviation is, the more spread out the returns will be.

The way we will calculate the variance and standard deviation will depend on the specific situation. In this chapter, we are looking at historical returns; so the procedure we describe here is the correct one for calculating the historical variance and standard

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

V. Risk and Return

12. Some Lessons from Capital Market History

© The McGraw-Hill Companies, 2002

CHAPTER 12 Some Lessons from Capital Market History

Frequency Distribution of Returns on Large-Company Stocks: 1926-2000

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