What is Variance?Variance is a metric that is needed to estimate the squared deviation of any random variable from the mean value. In the portfolio theory, the variance of return is called the measure of risk inherent in a singular or in an asset of portfolios.In general, the higher the value of variance, the bigger is the squared deviation of return of the given portfolio from the expected rate. The higher values show a larger risk, and low values indicate a lower inherent risk.Formula: How to Calculate VarianceWe have two different approaches to calculate the variance of returns −Probability ApproachHistorical ... Read More

The present value (PV) of a stock with zero growth is derived by dividing dividends distributed per period by the required return in that certain period. The formula is not an exact or guaranteed approach for evaluating a stock’s value but is more of a theoretical approach.The PV of a stock is specific to stocks that have zero or no growth. It is important to note that the period used for dividends and that for the required return must match. For example, for annual dividends, yearly return must be used.As stated above, the PV formula is more of a theoretical ... Read More

An investment’s “expected return” is the total money one can expect to lose or gain on an investment with a foreseeable rate of return. Basically, it lets one know whether the investment would be profitable providing enough money or it will be a loss, costing the investors’ money. By extension, it also tells one what kind of return you can expect when from a portfolio with a particular mix of investments.Understanding the Limits of Expected ReturnThe expected rate of return is more of a closer guess than a firm prediction. Regardless of whether you calculate the expected return of an ... Read More

Ordinary shares, also known as common shares, are used to raise capital for businesses. They are equity stocks that provide voting rights to the shareholders. Usually, dividends on ordinary shares are distributed according to the discretion of the management of the company that issues these shares. The dividends are distributed according to availability of profits. Common shares represent the ownership of shareholders in the company.ExplanationCommon shares provide the ownership rights to shareholders as per their number of shares the shareholders have. These shareholders have the right to voting and they are offered some privileges as an owner of a company. ... Read More

Not Cash EarningsThe biggest and, by far, the most prominent disadvantage of the P/E ratio is that the earnings it shows are the accounting earnings. These earnings are defined by the accounting standards of specific standards for a particular country. The earnings are not the cash earnings of the firm. In fact, many companies in the stock exchange report profits but gain no cash actually.Not Easy to Estimate the Value of a CompanyAnother problem with the P/E assumption is that the earnings stay the same for a considerable time in the future. So, if a company is trading at 10 ... Read More

Standard Deviation (SD) is a technique of statistics that represents the risk or volatility in investment. It gives a fair picture of the fund's return. It tells how much data can deviate from the historical mean return of the investment.The higher the Standard Deviation, the higher will be the ups and downs in the returns. For example, for a fund with a 15 percent average rate of return and an SD of 5 percent, the return will deviate in the range from 10-20 percent.Note − In SD, the ends of volatility are determined by adding and subtracting the average return ... Read More

What is Default Risk?Both corporate and governments issue bonds for the investors, but there is a clear difference between them. Government bonds are free from the chances of default. That is, it is believed that government bonds will never fail to pay the interest rates and the principal as and when required.On the other hand, corporate bonds are not free from the chances of default as the investment made by the corporate are more risky assets. Corporate bonds therefore have the chances of a default if they go bankrupt or face other issues.The risk of corporate bonds going bankrupt and ... Read More

It's known to us that redeemable shares can be bought back by the issuing company on a later date but irredeemable shares cannot be bought back by the issuer before the date of maturity. However, for internal operation and regulatory reasons, shares need to be valued. There are many methods to calculate the value of a share. Let's check some of them.There are three classical valuation approaches to find the value of shares −Income ApproachMarket ApproachCost ApproachIncome ApproachThe discounted cash flow method is an appropriate and suitable method to determine the value of a non-redeemable share. The two inputs required ... Read More

Companies may generally offer two types of shares − ordinary shares and preference shares. Preference shares have preference over ordinary shares in terms of payment of dividends and returning the capital in case the company wounds up. The capital offered by preference shares is known as share capital. Preference shares are a favorite of long-term investors.Note − The two types of shares have some common features but in general, their differences are more than the similarities.Types of Preference SharesPreference Shares can be grouped into three different categories −Redeemable and Irredeemable Preference SharesCumulative and Non-Cumulative Preference SharesParticipative and Non-Participative Preference SharesRedeemable ... Read More

Unlike most other bonds, pure discount bonds do not carry an explicit interest rate. Instead, they offer a lump sum depending on the current face value of the bond on a future date. The difference between the purchase value and face value gives the YTM or return to the investor in such bonds.Pure discount bonds have −Purchase value − The present price of the bond.Maturity value − That is equal to a face value in the future.Maturity period − The time taken for maturity.Discount bonds have a lower price than the par value or a bond that is being traded ... Read More