How to calculate returns from a stock?
If P. is the price of a stock in period t and Po: is the price in the previous period, then returns from the stock during the period is defined as
R. = ( P1 - Pt-i) /Pt-1
If the stock pays dividend D, during the period, then returns are defined as
R = ( P. - Pe: + D ) / P.
How to calculate the risk of a stock?
The risk of holding a stock is the standard deviation of returns from the stock during the period. Variance is a yearly concept, and hence the risk of the holding period has to be adjusted to make it per annum.
Consider the prices of a stock for a period of 100 days. Then we can calculate daily returns and we will have 99 observations of returns. If we draw the frequency distribution of the returns, then the standard deviation of the returns is the risk from holding the stock for the period. If we As impose the condition of normality on the distribution of returns, then students familiar with statistics would know the probability of returns falling in between ( returns tl . 28 ). That is, Based on past data, it is possible to have some idea about the extent to which returns can fall.
What is portfolio risk?
A portfolio of stocks is a collection of stocks held by an individual. For simplicity, let there be two stocks in the portfolio and let their share be w: and wz. Then, portfolio risk is defined as so
= Square Root of ( wi's:? - w - s2 ? + 2w: W2ps: S2 )
wheres, is portfolio risk, S, and sy are the standard deviations of returns from the two stocks, and p is the correlation of returns from the two stocks. Clearly, if the returns from the two stocks are positively correlated, then the portfolio risk will be more than the sum of holding the two stocks and hence it is not rational to hold these two stocks in the portfolio. On the other hand, if the returns from the stocks are negatively correlated, then portfolio risk would be lower than the sum of the individual risks. The purpose of portfolio diversification is to hold assets whose returns are not positively correlated. This is another way of saying not to put all eggs in one basket.
Difference between large-cap, mid-cap and small-cap firms
The difference between large-cap, mid-cap and small-cap firms is in terms of market capitalization. The market capitalization of a share is defined by the total paid-up shares of a company multiplied by the current price. As prices keep changing, market capitalization keeps changing.
Large-cap companies tend to be large in terms of their operations and some examples will be ABB Limited, ICICI Bank Ltd., and Maruti Suzuki Ltd.
Examples of mid-cap companies would include MRF, Havells India, Berger Paints and Castrol.
Some names of small-cap companies are Graphite India, KEC International, La Opala and Century Plyboard.
The Sensex is a 30 company index of market capitalization; turnover etc. and these are 30 large companies that are traded on the Bombay Stock Exchange ( BSE ). Along with NIFTY, the index of the National Stock Exchange ( NSE ), the Sensex is an index of stock market sentiment There are also various indices available like the Mid Cap Index, FMCG index etc.
0 comments:
Post a Comment