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Return and

Volatility risk Example: • One : About (standard deviation) • Portfolio : 10% 68% of the area falls within Volatility risk is the unpredictability one standard deviation above • Portfolio standard deviation: 20% of returns. Volatility risk is and one standard deviation measured statistically using standard • One standard deviation: below the expected return. deviation, which is an estimate of — 10% to 30%. • Two standard deviations: About the possible future variance of the About 68% of the time, the 95% of the area falls within actual returns to be generated by returns will fall in this range. two standard deviations above the asset class or portfolio around and two standard deviations its estimated expected return rate. • Two standard deviations: below the expected return. The standard deviation for an asset — 30% to 50%. class or a portfolio represents About 95% of the time, the its estimated average annual returns will fall in this range. investment risk. Investment • Expected return: the expected volatility risk is based on the notion return falls in the middle of the of uncertainty. If it is less certain chart. On the chart, 50% of the the asset class or portfolio will be area is to the right of the expected near its estimated expected return return and the other 50% lies to rate, the more uncertainty and risk the left of the expected return. is contained in that asset class.

Estimated expected return rate = 10% Standard deviation = 20%

68% of returns

95% of returns

Two standard One standard Expected return One standard Two standard deviations deviation deviation deviations -30% -10% 10% 30% 50%

The return distribution can be represented by the familiar bell-shaped curve. The area within the curve translates into the likelihood of occurrence.

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