Value at Risk

The histogram of stock returns reveals a great deal of risk. The average return during these 165 months is 1.9%. On average, an investor made almost 2% per month by owning stock in Enron. That sounds great compared to a savings account. Owning a stock, however, isn’t quite the same because the stock can go down in value. We need to think about the standard deviation of the percentage changes as well. The standard deviation of the percentage changes in Enron stock is s = 7.4%.

The bell-shaped distribution of percentage changes in Figure 8 suggests that we can use the Empirical Rule. Recall from Chapter 4 that the Empirical Rule connects the mean and SD to the concentration of data around the mean. Of all the various applications ...

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