VALUATON. Which bank? Part 3. And how to choose your bank for trading and investment
Suppose that you, as a risk-averse investor (or trader), wanted a simple rule for choosing the optimum investment decision when it comes to a bank.
Surely you want your money to be outlaid where it will deliver the highest expected return for a given level of risk.
How do you find out what the risk is?
At Bond Uni where I am still study at the age of 63 for my 4th degree, there is a statistical dimension we use to determine the risk associated with a stock. We call it variance.
Variance measures how far a set of closing prices are spread out over a period of time. A small variance indicates that the stock price may not have moved a lot during that period and it tended to close near the average price. The volatility of the stock is then very small. A large variance indicates higher volatility and therefore higher risk.
Standard deviation is simply the square root of the variance. One standard deviation encompasses about 65% of all the closing prices within a particular period and two standard deviations include about 95% of the all the closing prices. The lower the standard deviation is, the lower the risk.
The formula for measuring an unbiased estimate of the population variance from a fixed sample of n observations is the following: (s2) = Σ [(xi – x̅)2]/n-1
Here’s what the parts of the formula for calculating variance mean: s2 = Variance Σ = Summation, which means the sum of every term in the equation after the summation sign. xi = Sample observation. This represents every term in the set .x̅ = The mean. This represents the average of all the numbers in the set .n = The sample size. You can think of this as the number of terms in the set