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Four simple mathematics before investing

elearnmarkets | 01 Sep, 2017  | Follow Author | Add to my Favourites 
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You may have hated Maths in your school days, but now since you are on the path to becoming a value investors, you need to grip some numbers related to stocks or mutual funds that you intend to buy. These terms or concepts are very vital to understand the inherent risk and return associated with investments.

These are:

Standard Deviation

• Beta

• Sharpe Ratio

• Treynor Ratio


Standard deviation simply quantifies how much a series of numbers, such as fund returns, varies around its mean, or average. Investors like using standard deviation because it provides a precise measure of how varied a fund’s returns have been over a particular time frame both on the upside and the downside.

With this information, you can judge the range of returns your fund is likely to generate in the future.

The more a fund’s returns fluctuate from month to month, the greater it’s standard deviation.For instance, a mutual fund that gained 1% each and every month over the past 36 months would have a standard deviation of zero, because its monthly returns didn’t change from one month to the next. But here’s where it gets tricky: A mutual fund that lost 1% each and every month would also have a standard deviation of zero.

Why? Because, again, its returns didn’t vary. Meanwhile, a fund that gained 5% one month, 25% the next, and that lost 7% the next would have a much higher standard deviation; its returns have been more varied.

Standard deviation allows a fund’s performance swings to be captured into a single number. For most funds, future monthly returns will fall within one standard deviation of its average return 68% of the time and within two standard deviations 95% of the time.

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About elearnmarkets is a young vibrant company established with the vision of taking online financial education to a new level, both in India and abroad. Guided by their mission of spreading financial literacy, they are constantly experimenting with new education methodologies and technologies to make financial education convenient, effective, and accessible to all. They provide courses on basic finance, Fundamental Equity research, Technical analysis, Economics, Derivatives, Currencies and Commodities and many of their courses are conducted by reputed market experts and certified by leading exchanges like NSE, MCX and NCDEX.

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Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor accept any liability whatsoever arising from the use of any of the above contents.

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