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Time Value of Money
Annuities
Perpetuities
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Future Value of an Uneven Cash flow
Probability Distribution
Standard Deviation
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Standard Deviation


We can measure risk by using standard deviation. Higher standard deviation means higher risk.



Here is the example from the
probability distribution page

Probability Distribution - In Business

Economic Outcome Probability Return on Investment
Great 20% 25%
Good 40% 15%
So-So 30% 5%
Really Bad 10% 0%



(Sorry, I don't know how to write sigma and the square root sign in html, so I can't show you the formula for Standard Deviation, but you can still plug in your numbers to the chart below)

Economic Outcome Return on Investment minus ERR - the Expected Rate of Return equals answer squared times Probability of the Economic Outcome equals Answer
Great 25% - 12.5% = 12.5 156.25 X 20% = 31.25
Good 15% - 12.5% = 2.5 6.25 X 40% = 2.5
So-So 5% - 12.5% = 7.5 56.25 X 30% = 16.875
Really Bad 0% - 12.5% = 12.5 156.25 X 10% = 15.625
                Total = 66.25
  • So the total is 66.25. This is called the Variance.
  • The square root of 66.25 = 8.139
  • So the Standard Deviation is 8.139







About the author

Mark McCracken

Author: Mark McCracken is a corporate trainer and author living in Higashi Osaka, Japan. He is the author of thousands of online articles as well as the Business English textbook, "25 Business Skills in English".

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