11.2 Expected return, Standard deviation of returns and the Relative risk of an individual asset

Expected Return: The expected return of an individual asset is the anticipated average return that an investor can expect to earn from holding that asset over a given period. It is calculated by weighting the possible returns by their respective probabilities and summing them up. The expected return provides an estimate of the average performance of the asset based on historical data or projected future performance.

Standard Deviation of Returns: The standard deviation of returns is a measure of the volatility or variability of the returns of an asset. It quantifies the degree to which the actual returns of an asset deviate from its expected return. A higher standard deviation indicates greater variability and higher risk associated with the asset’s returns, while a lower standard deviation suggests more stability and lower risk.

Relative Risk of an Individual Asset: The relative risk of an individual asset refers to its risk level compared to other assets or a benchmark. It is commonly measured by comparing the standard deviation of returns for the asset to the standard deviation of returns for a market index or a portfolio of diversified assets. The relative risk helps investors assess the riskiness of an asset in relation to the overall market or a specific investment strategy.

In summary, the expected return provides an estimate of the average performance of an asset, while the standard deviation of returns measures the volatility or variability of those returns. The relative risk of an individual asset helps investors compare its risk level to other assets or a benchmark, allowing them to make informed decisions about portfolio diversification and risk management.

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