Bank Valuation. Which bank? Part 3. And how to choose your bank for trading and investment

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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




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