# Chapter 6 - Risk and Rates of Return

2005, Pearson Prentice Hall

Chapter 6: Objectives

** Inflation and rates of return How to measure risk
**

(variance, standard deviation, beta) How to reduce risk (diversification) How to price risk (security market line, Capital Asset Pricing Model)

**Inflation, Rates of Return, and the Fisher Effect
**

Interest Rates

Conceptually:
Interest Rates
.

Conceptually:
Nominal risk-free Interest Rate
Interest Rates
krf
.

Conceptually:
Nominal risk-free Interest Rate
Interest Rates
=
krf
.

Conceptually:
Nominal risk-free Interest Rate
Interest Rates
Real risk-free Interest Rate
=
krf
k*
.

Conceptually:
Nominal risk-free Interest Rate
Interest Rates
Real risk-free Interest Rate
=
+
krf
k*
.

Conceptually:
Nominal risk-free Interest Rate
Interest Rates
Real risk-free Interest Rate
Inflationrisk premium
=
+
krf
k*
IRP
.

Conceptually:
Nominal risk-free Interest Rate
Interest Rates
Real risk-free Interest Rate
Inflationrisk premium
=
+
krf
Mathematically:
k*
IRP
.

Conceptually:
Nominal risk-free Interest Rate
Interest Rates
Real risk-free Interest Rate
Inflationrisk premium
=
+
krf
Mathematically:
k*
IRP
(1 + krf) = (1 + k*) (1 + IRP)
.

Conceptually:
Nominal risk-free Interest Rate
Interest Rates
Real risk-free Interest Rate
Inflationrisk premium
=
+
krf
Mathematically:
k*
IRP
(1 + krf) = (1 + k*) (1 + IRP)
This is known as the “Fisher Effect”
.

0485). and the nominal
rate is 8%.85%
.Interest Rates
Suppose the real rate is 3%.08) = (1.03) (1 + IRP) (1 + IRP) = (1. What is the inflation rate premium?
(1 + krf) = (1 + k*) (1 + IRP) (1. so IRP = 4.

.Term Structure of Interest Rates
The pattern of rates of return for debt
securities that differ only in the length of time to maturity.

Term Structure of Interest Rates
The pattern of rates of return for debt
securities that differ only in the length of time to maturity.
yield to maturity
time to maturity (years)
.

Term Structure of Interest Rates
The pattern of rates of return for debt
securities that differ only in the length of time to maturity.
yield to maturity
time to maturity (years)
.

yield to maturity
time to maturity (years)
.Term Structure of Interest Rates
The yield curve may be downward
sloping or “inverted” if rates are expected to fall.

Term Structure of Interest Rates
The yield curve may be downward
sloping or “inverted” if rates are expected to fall.
yield to maturity
time to maturity (years)
.

For a Treasury security. what is the required rate of return?
.

For a Treasury security. what is the required rate of return?
Required rate of return
=
.

. the rate of return on a Treasury security is considered the “risk-free” rate of return.For a Treasury security. what is the required rate of return?
Required rate of return
=
Risk-free rate of return
Since Treasuries are essentially free of default risk.

what is the required rate of return?
.For a corporate stock or bond.

For a corporate stock or bond. what is the required rate of return?
Required rate of return
=
.

For a corporate stock or bond. what is the required rate of return?
Required rate of return Risk-free rate of return
=
.

For a corporate stock or bond. what is the required rate of return?
Required rate of return Risk-free rate of return Risk premium
=
+
How large of a risk premium should we require to buy a corporate security?
.

. growth potential. etc. given its price.the return that an
investor requires on an asset given its risk and market interest rates.
Required Return .the return that an
investor expects to earn on an asset.Returns
Expected Return .

Utility Orl.Expected Return
State of Probability Return Economy (P) Orl. the expected return on the stock is just a weighted average:
.50 10% 14% Boom .30 14% 30% For each firm.20 4% -10% Normal . Tech Recession .

30 14% 30% For each firm.20 4% -10% Normal .. Tech Recession .50 10% 14% Boom .Expected Return
State of Probability Return Economy (P) Orl.+ P(kn)*kn
.. Utility Orl. the expected return on the stock is just a weighted average:
k = P(k1)*k1 + P(k2)*k2 + .

+ P(kn)*kn k (OU) = .. Utility Orl.50 10% 14% Boom .3 (14%) = 10%
.20 4% -10% Normal .5 (10%) + ..Expected Return
State of Probability Return Economy (P) Orl.2 (4%) + . Tech Recession .30 14% 30%
k = P(k1)*k1 + P(k2)*k2 + .

5 (14%) + .2 (-10%)+ . Tech Recession .3 (30%) = 14%
. Utility Orl..Expected Return
State of Probability Return Economy (P) Orl.30 14% 30%
k = P(k1)*k1 + P(k2)*k2 + .50 10% 14% Boom .20 4% -10% Normal ..+ P(kn)*kn k (OI) = .

Based only on your expected return calculations. which stock would you prefer?
.

Have you considered
RISK?
.

What is Risk?
The possibility that an actual return
will differ from our expected return.
Uncertainty in the distribution of
possible outcomes.
.

.What is Risk?
Uncertainty in the distribution of
possible outcomes.

4 0.3 0.05 0 4 8 12
return
.1 0.15 0.What is Risk?
Uncertainty in the distribution of
possible outcomes.5 0.
Company A
0.35 0.25 0.45 0.2 0.

05 0 4 8 12
0.1 0.What is Risk?
Uncertainty in the distribution of
possible outcomes.15 0.04 0.5 0.06 0.14 0.2 0.4 0.16 0.35 0.12 0.1 0.2 0.02 0 -10 -5 0 5 10 15 20 25 30
Company B
return
return
.3 0.25 0.18 0.08 0.45 0.
Company A
0.

52 .5 21 143402 98 95 9549 -3 115 40 MSFT … 29 558918 55 52 5194 -475
. we could look at the stock’s price range over the past year.How do We Measure Risk?
To get a general idea of a stock’s
price variability.
52 weeks Yld Vol Net Hi Lo Sym Div % PE 100s Hi Lo Close Chg 134 80 IBM .

and. The greater the standard deviation. Standard deviation is a measure of the dispersion of possible outcomes. the greater the uncertainty.
. the greater the risk. therefore.How do We Measure Risk?
A more scientific approach is to
examine the stock’s standard deviation of returns.

Standard Deviation
s=
S
i=1
n
(ki -
2 k)
P(ki)
.

.s=
S (ki i=1
n
2 k)
P(ki)
Orlando Utility. Inc.

2) = 7.10%)2 (. ( 4% .s=
S (ki i=1
n
2 k)
P(ki)
Orlando Utility.2
. Inc.

s=

S (ki i=1

n

2 k)

P(ki)

Orlando Utility, Inc. ( 4% - 10%)2 (.2) = 7.2 (10% - 10%)2 (.5) = 0

s=

S (ki i=1

n

2 k)

P(ki)

Orlando Utility, Inc. ( 4% - 10%)2 (.2) = 7.2 (10% - 10%)2 (.5) = 0 (14% - 10%)2 (.3) = 4.8

s=

S (ki i=1

n

2 k)

P(ki)

Orlando Utility, Inc. ( 4% - 10%)2 (.2) = (10% - 10%)2 (.5) = (14% - 10%)2 (.3) = Variance =

7.2 0 4.8 12

5) = 0 (14% .2 (10% .10%)2 (.10%)2 (. = 12 =
.10%)2 (.s=
S (ki i=1
n
2 k)
P(ki)
Orlando Utility.2) = 7. dev.8 Variance = 12 Stand.3) = 4. ( 4% . Inc.

2 (10% .46%
.2) = 7.10%)2 (.5) = 0 (14% .s=
S (ki i=1
n
2 k)
P(ki)
Orlando Utility. = 12 = 3.3) = 4. dev. Inc.8 Variance = 12 Stand.10%)2 (. ( 4% .10%)2 (.

s=
S (ki i=1
n
2 k)
P(ki)
Orlando Technology. Inc.
.

2) = 115.2
. (-10% . Inc.s=
S (ki i=1
n
2 k)
P(ki)
Orlando Technology.14%)2 (.

14%)2 (. (-10% .5) = 0
.2) = 115. Inc.s=
S (ki i=1
n
2 k)
P(ki)
Orlando Technology.14%)2 (.2 (14% .

14%)2 (.2 (14% .2) = 115. (-10% .14%)2 (.5) = 0 (30% .s=
S (ki i=1
n
2 k)
P(ki)
Orlando Technology.3) = 76.14%)2 (. Inc.8
.

2 (14% .s=
S (ki i=1
n
2 k)
P(ki)
Orlando Technology.5) = 0 (30% .2) = 115.3) = 76. (-10% .8 Variance = 192
. Inc.14%)2 (.14%)2 (.14%)2 (.

14%)2 (. (-10% .14%)2 (. = 192 =
.3) = 76. dev.14%)2 (.8 Variance = 192 Stand.2 (14% .5) = 0 (30% .s=
S (ki i=1
n
2 k)
P(ki)
Orlando Technology. Inc.2) = 115.

2 (14% . (-10% .5) = 0 (30% .s=
S (ki i=1
n
2 k)
P(ki)
Orlando Technology.3) = 76. Inc.14%)2 (.8 Variance = 192 Stand. = 192 = 13.14%)2 (.14%)2 (.2) = 115. dev.86%
.

Which stock would you prefer? How would you decide?
.

Which stock would you prefer? How would you decide?
.

86%
.46%
14%
13.Summary
Orlando Utility Orlando Technology
Expected Return
Standard Deviation
10%
3.

It depends on your tolerance for risk!
Remember. there’s a tradeoff between risk and return.
.

. there’s a tradeoff between risk and return.It depends on your tolerance for risk!
Return
Risk
Remember.

there’s a tradeoff between risk and return.It depends on your tolerance for risk!
Return
Risk
Remember.
.

How does this work?
.Portfolios
Combining several securities
in a portfolio can actually reduce overall risk.

Suppose we have stock A and stock B. The returns on these stocks do not tend to move together over time (they are not perfectly correlated).
rate of return
time
.

Suppose we have stock A and stock B.
kA
rate of return
time
. The returns on these stocks do not tend to move together over time (they are not perfectly correlated).

The returns on these stocks do not tend to move together over time (they are not perfectly correlated).
kA
rate of return
kB
time
.Suppose we have stock A and stock B.

What has happened to the variability of returns for the portfolio?
kA
rate of return
kB
time
.

What has happened to the variability of returns for the portfolio?
kA
rate of return
kp kB
time
.

.Diversification
Investing in more than one security
to reduce risk. the portfolio is perfectly diversified. If two stocks are perfectly negatively correlated. diversification has no effect on risk. If two stocks are perfectly positively correlated.

. would you be diversified? YES! Would you have eliminated all of your risk? NO! Common stock portfolios still have risk. If you owned a share of every stock
traded on the NYSE and NASDAQ.

Company-unique risk (unsystematic risk) is diversifiable. This type of risk cannot be diversified away. This type of risk can be reduced through diversification.Some risk can be diversified away and some cannot.
.
Market risk (systematic risk) is
nondiversifiable.

Unexpected changes in cash flows due to tax rate changes.Market Risk
Unexpected changes in interest
rates. and the overall business cycle.
. foreign competition.

A huge oil tank bursts and floods a company’s production area.
.Company-unique Risk
A company’s labor force goes on
strike. A company’s top management dies in a plane crash.

company-unique risk is reduced.As you add stocks to your portfolio.
.

portfolio risk
number of stocks
. company-unique risk is reduced.As you add stocks to your portfolio.

As you add stocks to your portfolio. company-unique risk is reduced.
portfolio risk
Market risk number of stocks
.

As you add stocks to your portfolio.
portfolio risk
companyunique risk
Market risk number of stocks
. company-unique risk is reduced.

but which would be more affected: a) Retail food chain b) Commercial bank
. For example: Interest rate changes affect all firms.Do some firms have more market risk than others?
Yes.

but which would be more affected: a) Retail food chain b) Commercial bank
.Do some firms have more market risk than others?
Yes. For example: Interest rate changes affect all firms.

we need to be able to measure market risk. the market compensates investors for accepting risk .
So . Companyunique risk can and should be diversified away. Note
As we know.but only for market risk.
.

. Specifically. beta is a measure of how an individual stock’s returns vary with market returns.
Beta: a measure of market risk.This is why we have Beta.
It’s a measure of the “sensitivity” of
an individual stock’s returns to changes in the market.

**The market’s beta is 1
**

A firm that has a beta = 1 has average

market risk. The stock is no more or less volatile than the market. A firm with a beta > 1 is more volatile than the market.

**The market’s beta is 1
**

A firm that has a beta = 1 has average

market risk. The stock is no more or less volatile than the market. A firm with a beta > 1 is more volatile than the market.

(ex: technology firms)

**The market’s beta is 1
**

A firm that has a beta = 1 has average

market risk. The stock is no more or less volatile than the market. A firm with a beta > 1 is more volatile than the market.

(ex: technology firms)

** A firm with a beta < 1 is less volatile than
**

the market.

**The market’s beta is 1
**

A firm that has a beta = 1 has average

market risk. The stock is no more or less volatile than the market. A firm with a beta > 1 is more volatile than the market.

(ex: technology firms)

** A firm with a beta < 1 is less volatile than
**

the market.

(ex: utilities)

Calculating Beta

returns 15 10 5 S&P 500 returns -15 -10 -5 -5 5 10 15
-10 -15
.Calculating Beta
XYZ Co.

-15 . . . .. .
15
. ..Calculating Beta
XYZ Co. 10 . -10 . . returns 15
. .. . . . . . . -10 -5 -5 10 . . .
S&P 500 returns
-15
.. . 5 . 5 . .. . . . . . ... . . .. .

. -10 -5 -5 10 .. . . .. .. .
S&P 500 returns
-15
. . . . . .
15
. . 5 . . . . . 10 . -10 .. . . -15 . .Calculating Beta
XYZ Co. . . .. . .. 5 . returns 15
. . ... .

... . .. . . 5 .. . . . . .Calculating Beta
XYZ Co. . . . . 10 . .
15
.. . -15 . . .. returns 15
. . . . .. -10 -5 -5 10 . . .. -10 .20
S&P 500 returns
-15
. 5 . .
Beta = slope = 1. . .

Summary:
We know how to measure risk. We need to know how to price risk so we will know how much extra return we should require for accepting extra risk. We know how to reduce overall risk to only market risk through diversification.
. using
standard deviation for overall risk and beta for market risk.

.What is the Required Rate of Return?
The return on an investment
required by an investor given market interest rates and the investment’s risk.

Required rate of return
=
.

Required rate of return
=
Risk-free rate of return
+
.

Required rate of return
=
Risk-free rate of return
+
Risk premium
.

Required rate of return
=
Risk-free rate of return
+
Risk premium
market risk
.

Required rate of return
=
Risk-free rate of return
+
Risk premium
market risk
companyunique risk
.

Required rate of return
=
Risk-free rate of return
+
Risk premium
market risk
companyunique risk
can be diversified away
.

Required rate of return
Let’s try to graph this relationship!
Beta
.

Required rate of return
12%
.
Risk-free rate of return (6%)
1
Beta
.

security market line (SML)
Risk-free rate of return (6%)
1
Beta
.Required rate of return
12%
.

.This linear relationship between risk and required return is known as the Capital Asset Pricing Model (CAPM).

Required rate of return
SML
12%
.
Risk-free rate of return (6%)
0
1
Beta
.

Required rate of return
Is there a riskless (zero beta) security?
SML
12%
.
Risk-free rate of return (6%)
0
1
Beta
.

0
1
Beta
.Required rate of return
Is there a riskless (zero beta) security?
SML
12%
.
Risk-free rate of return (6%)
Treasury securities are as close to riskless as possible.

Required rate of return
Where does the S&P 500 fall on the SML?
SML
12%
.
Risk-free rate of return (6%)
0
1
Beta
.

Required rate of return
Where does the S&P 500 fall on the SML?
SML
12%
.
The S&P 500 is a good approximation for the market 0
Beta
Risk-free rate of return (6%)
1
.

Required rate of return
SML Utility Stocks
12%
.
Risk-free rate of return (6%)
0
1
Beta
.

Required rate of return
High-tech stocks
SML
12%
.
Risk-free rate of return (6%)
0
1
Beta
.

The CAPM equation:
.

The CAPM equation:
kj = krf + b j (km .krf )
.

.krf )
where:
kj = the required return on security
j. b j = the beta of security j. and km = the return on the market index.The CAPM equation:
kj = krf + b j (km .
krf = the risk-free rate of interest.

Example:
Suppose the Treasury bond rate is
6%. what should be the required rate of return on Disney stock?
. According to the CAPM. the average return on the S&P 500 index is 12%. and Walt Disney has a beta of 1.2.

132 = 13.2% return.
..2 (.06 + 1.kj = krf + b (km .krf )
kj = . Disney stock should be priced to give a 13.12 .06) kj = .2%
According to the CAPM.

Required rate of return
SML
12%
.
Risk-free rate of return (6%)
0
1
Beta
.

every security should lie on the SML
SML
12%
.
Risk-free rate of return (6%)
0
1
Beta
.Required rate of return
Theoretically.

investors are being fully compensated for risk.Required rate of return
Theoretically.
.
0
1
Beta
. every security should lie on the SML
SML
12%
Risk-free rate of return (6%)
If every stock is on the SML.

Required rate of return
If a security is above the SML.
Risk-free rate of return (6%)
0
1
Beta
.
SML
12%
. it is underpriced.

If a security is below the SML.
SML
12%
.Required rate of return
If a security is above the SML. it is underpriced. it is overpriced.
Risk-free rate of return (6%)
0
1
Beta
.

Simple Return Calculations
.

Simple Return Calculations
$50 t $60 t+1
.

50 50
= 20%
.Pt Pt
=
60 .Simple Return Calculations
$50 t $60 t+1
Pt+1 .

Simple Return Calculations
$50 t $60 t+1
Pt+1 .Pt Pt
=
60 .50 50
= 20%
Pt+1
Pt
-1 =
60
50
-1 = 20%
.

00 $62.00 $80.00 $82.80 $59.00
(a) (b) monthly expected return return
(a .b)2
.50 $73.month Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
price $50.00 $58.00 $64.50 $69.00 $86.00 $75.00 $69.00 $63.

00 $80.00 $82.00 $63.00 $69.80 $59.00
(a) (b) monthly expected return return 0.50 $73.160
(a .00 $75.50 $69.00 $64.month Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
price $50.00 $62.00 $86.b)2
.00 $58.

00 $80.00
(a) (b) monthly expected return return 0.80 $59.160 0.month Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
price $50.100
(a .00 $63.b)2
.00 $75.00 $86.50 $69.00 $62.00 $58.50 $73.00 $69.00 $64.00 $82.

100 -0.00 $86.00 $82.00 $62.00 $63.00
(a) (b) monthly expected return return 0.075
(a .50 $73.80 $59.b)2
.month Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
price $50.00 $58.50 $69.00 $69.160 0.00 $75.00 $64.00 $80.

051
(a .00 $80.00 $69.00
(a) (b) monthly expected return return 0.075 0.80 $59.100 -0.00 $62.50 $73.month Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
price $50.160 0.00 $58.50 $69.00 $75.b)2
.00 $86.00 $63.00 $82.00 $64.

00 $58.00 $80.040
(a .100 -0.051 0.00 $62.00
(a) (b) monthly expected return return 0.00 $82.075 0.50 $73.00 $63.00 $75.00 $86.month Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
price $50.b)2
.80 $59.50 $69.00 $69.00 $64.160 0.

100 -0.50 $69.040 0.80 $59.00 $58.00 $63.075 0.00 $80.00 $64.00 $75.00
(a) (b) monthly expected return return 0.b)2
.00 $82.50 $73.00 $62.160 0.051 0.00 $86.070
(a .month Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
price $50.00 $69.

100 -0.00 $62.00
(a) (b) monthly expected return return 0.00 $69.00 $75.040 0.075 0.50 $69.00 $82.00 $58.month Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
price $50.160 0.00 $80.80 $59.50 $73.00 $64.000
(a .00 $86.b)2
.00 $63.070 0.051 0.

month Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
price $50.00 $69.00 $80.000 0.50 $69.b)2
.070 0.00 $63.00 $58.80 $59.00 $62.00 $75.040 0.00 $86.00 $82.100 -0.160 0.075 0.50 $73.00
(a) (b) monthly expected return return 0.051 0.00 $64.087
(a .

040 0.000 0.80 $59.50 $69.00 $69.00 $82.160 0.00 $58.00 $62.month Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
price $50.00 $86.087 0.00 $75.100
(a .051 0.b)2
.50 $73.075 0.00 $80.00 $63.00
(a) (b) monthly expected return return 0.00 $64.100 -0.070 0.

50 $73.100 -0.50 $69.115
(a .100 -0.00 $63.b)2
.00 $82.00 $58.051 0.00 $75.00
(a) (b) monthly expected return return 0.040 0.80 $59.070 0.month Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
price $50.000 0.00 $64.00 $69.00 $80.00 $62.075 0.087 0.160 0.00 $86.

00 $80.50 $69.b)2
.00 $64.051 0.00 $75.00 $62.00
(a) (b) monthly expected return return 0.096
(a .00 $63.070 0.00 $82.075 0.040 0.100 -0.087 0.00 $69.00 $58.115 0.month Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
price $50.50 $73.00 $86.000 0.160 0.100 -0.80 $59.

00 $58.00 $69.00 $82.000 0.100 -0.100 -0.50 $73.00 $86.00
(a) (b) monthly expected return return 0.070 0.00 $64.115 0.b)2
.00 $75.month Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
price $50.087 0.00 $63.075
(a .50 $69.040 0.051 0.075 0.160 0.00 $80.00 $62.80 $59.096 0.

00
(a) (b) monthly expected return return 0.087 0.00 $69.049 0.040 0.50 $73.100 -0.b)2
.115 0.049 0.049 0.049
(a .096 0.049 0.160 0.049 0.000 0.049 0.100 -0.00 $75.80 $59.50 $69.049 0.month Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
price $50.049 0.00 $58.00 $82.049 0.00 $86.00 $63.075 0.070 0.00 $62.00 $64.049 0.051 0.075 0.00 $80.049 0.

000441 0.040 0.00 $64.049 0.000 0.000081 0.049 0.049 0.028960 0.049 0.b)2 0.015376 0.049
(a .012321 0.049 0.00 $69.049 0.002601 0.001444 0.160 0.049 0.049 0.00 $63.100 -0.50 $73.00 $82.075 0.002401 0.00 $86.000004 0.087 0.002090 0.00 $58.070 0.002601 0.049 0.096 0.00
(a) (b) monthly expected return return 0.month Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
price $50.000676
.00 $80.50 $69.00 $62.049 0.80 $59.049 0.075 0.115 0.00 $75.100 -0.051 0.

Dev: sum.049 0. and take sq root: 0.00 $82.100 -0.049 0.049 0.049 0.075 0.00 $86.075 0.80 $59.012321 0.50 $69.160 0.00 $80.049 0.50 $73.000081 0. divide by (n-1).049 0.049 0.040 0.00 $63.002601 0.b)2 0.00 $64.000676
St.001444 0.00 $75.051 0.000 0.002090 0.0781
.049
(a .000441 0.049 0.087 0.028960 0.049 0.115 0.month Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
price $50.00
(a) (b) monthly expected return return 0.002601 0.070 0.00 $58.100 -0.00 $69.096 0.002401 0.049 0.000004 0.049 0.00 $62.015376 0.

followed by sigma key (top right corner). Shift 7 gives you the expected return.Calculator solution using HP 10B:
Enter monthly return on 10B
calculator. Shift 8 gives you the standard deviation.
.