BNAD 276 Lecture Notes - Lecture 3: Average Absolute Deviation, Sharpe Ratio, Standard Deviation
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Scaled to something that makes it easy to measure. When comparing relative dispersion of different sets of observation, need to use (cv) which is standard deviation divided by the mean. Gauge the variability of a data set. Range = maximum value - minimum value. An average of the absolute difference of each observation from the mean (powerpoint until slide 66) The performance of an asset is measured by its rate of return. The rate of return may be evaluated in terms of its reward (mean) and risk (variance) Higher average returns are often associated with higher risk (volatility) The sharpe ratio uses the mean and variance to evaluate risk. Measures the extra reward per unit of risk. For and investment, i, the sharpe ratio is computed as. The number of standard deviations that value is from the mean. A sample value that is equal to the mean has a z-score of 0.