VALUATION METHODS

MODULE 0: COURSE INTRODUCTION

BUSINESS VALUATION
- Is the process of ascertaining the worth of an entire business, the
worth of the ownership interest in the business, or the worth of a
particular asset or liability of the business.
- We’ll try to value the entire business (e.g., the company is liquidating)
- It is a set of methods individuals and investors can use to determine
how much a business is worth. These calculations may include
elements such as equipment, inventory, property, and liquid assets.
Other factors organizations can consider include projected earnings,
management structure, and share price.
o We have to value the assets one by one.
o The assets on the FS are valued based on PFRS or GAAP; we’ll
see if it’s the same here.
o Projected earnings – the time value of money is considered
(present value).

VALUATION IS A COMBINATION OF BOTH SCIENCE AND ART

- The science aspect involves a systematic application of a body of well-
established theories in deriving the value. These theories rest on an
assumption of rational behavior of investors and an assumption of an
objective of a business.
o Intrinsic value
o We’re the one buying so we have to know the value of the
company we’re buying.
- The art perspective involves using subjective judgment of the
particular circumstances in applying the theoretical model in business.
o Objective – based on the document we have, use of facts
o Subjective – based on the company that will invest

WHAT IS VALUATION?
- Valuation is the analytical process of placing value on a company
based on its assets, the current and future earnings, and cash flow
generating capacity.
o Time value papasok
o It could be earnings or expenditures.
o Iba ibang assets, iba ibang methods ang gagamitin natin.

WHY VALUATIONS ARE REQUIRED?

- A share valuation will be necessary.
o To buy and sell a share, intrinsic value is useful.
 Common/ordinary shares usually
 o Merger with another company
 You determine the value of the shares of both companies
then determine the ratio (e.g., 5 shares of Company A for
every share of Company B.
o Shares need to be valued for the purposes of taxation.
o Shares are pledged as collateral for a loan.
o Divorce settlements
 You try to divide the property of the spouses.
o Especially for unquoted companies, when:
 Initial Public Offer (IPO)
 Private placements

INFORMATION REQUIRED FOR VALUATION

- This list is not exhaustive, also the information required depends on
the purpose
- Financial statements (Annual report)
o Statement of Financial Position
o Statement of Profit or Loss and Other Comprehensive Income
o Statement of Changes in Equity
o Statement of Cash Flows
o Disclosure Notes
 You have to check the reputation and environment of the
firm.
- Background information on the industry and competitors.
o You try to check that particular industry to its competitor – same
industry ba tinutukoy natin.
- Information about the management and key personnel
- Other reports:
o Corporate Social Responsibility (CSR) Report
o Environmental Report
o Chairman’s Report
o Audit Report
 Is it qualified, unqualified, or a disclaimer?

IMPORTANT POINTS IN USING THE ESTIMATED VALUE

- Value is as good as the information available to the valuer.
o Valuer can derive a different value of the business or asset if
they possess different sets of information.
o Ex: Bidder versus management of a target company.
 Kung hindi pareho, then they have to discuss.
- Value is time dependent.
o The value of the business or asset changes over time as relevant
new information arrives. (Valuation date)
 We have to determine the valuation date.
 o The valuer considers all factors known up to that point in time in
forming the assessment of value.
 Kaya importante yung valuation date
- Value is purpose dependent.
o Value of a business or an asset can differ because the objectives
of the valuation are different.
o Ex: Acquisition and Liquidation
 Is that an acquisition or liquidation transaction?
- Value is not objective.
o Even if the purpose of the valuation exercise and the valuation
models used are similar, the value derived can still differ.
o Subjective judgments are often required when selecting inputs.
- Value and current market price are not necessarily the same.
o For some, market is the best estimate of value.
 Can be valued based on Market value, Intrinsic value, etc.
o All times market price may deviate from the value of the cash
flows it is expected to generate.
 Hindi binibigay yung actual price right away, kumbaga
there’s a restriction with that company not to give the
price. Limitation yan in terms of valuing the price.
o Deviation may be because of market error or information is not
available to market participants at that point in time.
 Or due to temporary irrational market behaviors by
investors,
 Or because the current market price pertains to a small
amount of shares and thus may reflect the value to
minority shareholders only.

THINGS TO REMEMBER
- Since valuation is a subjective exercise and the value depends on the
purpose and circumstances of the valuation:
o Identify the subject to be valued
o Understand why the valuation to be carried out.
 These are the two issues known as the context of
valuation.

WHAT WE ARE VALUING: THE SUBJECT OF VALUATION

- Could be an entire business or a company.
- A business is a commercial, industrial, service, or investment entity (or
a combination thereof) pursuing an economic activity.
- It comprises both tangible and intangible assets.
- The value of a business is commonly referred to as either ‘firm value’
or ‘enterprise value.’

CATEGORIES: SUBJECT OF VALUATION

 - Business (including companies)
- Ordinary shares in companies
o Minority state
o Controlling state
- Other forms of equities in companies (such as preference shares,
employee share options)
- Debts in companies
o Bank loans
o Bonds
o Convertible bonds
o Others
- Specific assets in the business such as derivative contracts, brands,
patents, leasing agreements, and interest domain names.

WHY DO WE VALUE?
- The value of the subject can vary with the purpose of the valuation
exercise.
o The standard of value
 What value are we going to use?
 Ex: Intrinsic value
o The premise of value

STANDARD OF VALUE
- Relates to an identification of the type of value being used in a specific
valuation engagement.
- The standard of value used by an investment analysis for the purpose
of valuing a publicly traded company in order to make trade
recommendations often differs from the standard of value used by an
acquirer in assessing the value of the company as an acquisition
target.
o Consider if you are the investor or acquirer
o Different ang value ni acquirer kay investor, but in most times
ang assumption natin ang gagamitin natin is ang investment
analysis.
- Intrinsic Value – refers to a fundamental, objective value contained in
an object, asset, or financial contract
o The real value of a company, asset, etc., may not be the price at
which it could be sold for now.
o The book value
o Intrinsic Value > Current Market Price = better for you to BUY
Intrinsic Value < Current Market Price = better for you to SELL if
you are a holder of the shares.
- According to analysts, this is generally considered to be the
appropriate value for a share.
 - However, the term ‘investment value’ (or value to the owner) is often
used as the standard of value in the acquisition space.
- Defined as the value of an asset to the owner, or a prospective owner,
for individual investment or operational objectives.
o Owners have different outlooks or decisions so it becomes
subjective.
- This value will vary for different owners as each of them will have a
different outlook relating to the level of synergies and cost savings that
they can derive from acquiring the company.
- The estimated share value of the same company can differ under
different standards of value adopted for different purposes of the
valuation exercise.
- Hence, depending on the objectives of the valuation and the context in
which it is to be carried out, valuers need to be familiar with the
relevant standards.
o Iba iba yung standards ng value, at the same time the objective
of the valuation will be different. Depende sa objective and
standard of value that we will use.
o Objective ng valuation (balikan sa taas)

PREMISE OF VALUE
- Refers to an assumption regarding the most likely set of transactional
circumstances that may be applicable to the subject valuation.
o The premise may either be:
 Going concern ba yung company?
 The business will continue indefinitely.
 The reason for that sale is that the company is already
liquidating.
- This is an assumption relating to the status of the business under
which the valuation is carried out.

PREMISES OF VALUATION
- Going Concern
o The valuer assumes that the business will maintain its economic
activity into the foreseeable future (common practice
o This premise yields the highest value.
 Kasi we can wait for a higher price – highest bidder sa
kanya.
- Liquidation
o The valuer assumes that the business may cease operations.
 Orderly Liquidation
 Assets are sold over a reasonable period of time.
 Forced Liquidation
 Assets are sold as quickly as possible.
 - In general, the reasons for valuation could be classified either as share
market valuation or corporate valuation.
o Share market valuation
 Perspective of investors
o Corporate Valuation
 Typically carried out from the perspective of the company’s
management and advisers.

HOW DO WE VALUE?
- All valuation exercises or engagements should follow a process.

STEPS IN THE VALUATION PROCESS

1) Define the engagement and scope of work.
o Ano yung composition ng trabaho and that will determine the
appropriate price for that engagement.
2) Understand the subject of the valuation and the business
o Most critical part of the valuation. You have to understand the
subject of the valuation. Ano ang gagawin mo for that particular
valuation.
3) Determine information requirements, availability, and quality
o What will be the requirements, information available, and need?
o When we enter into the engagement we have to be particular
kung ano yung scope of work and availability of information baka
may limitations.
4) Select the valuation approach and methodology.
o Dito papasok yung mga computations. The standard of value
that will be applied, method, or approaches.
5) Determine the relevant valuation parameters and results.
o From the computations we gathered, we have to evaluate.
Papasok yung research analysis or SWOT analysis.
6) Carry out sensitivity analysis and valuation crosschecks.
o We have to come up with the valuation report.

STEP 1: DEFINE THE ENGAGEMENT AND SCOPE OF WORK

- What needs to be done?
o Nakaindicate ano ano yung mga trabaho that are expected from
us.
- Ensures that the final product is in line with the expectations of the
client
- Context of the valuation
o Who is the engaging client?
o Who are the users of the valuation?
o What is being valued in this engagement?
 Dito papasok yung market, income statement, or asset
approach.
 o What are the standards of value and premise of value to be
adopted?
o What is the valuation date?
 Is it in 2 months time? In the near future?
o What are the timeline, deliverables, and types of opinions
required?

STEP 2: UNDERSTAND THE SUBJECT OF VALUATION AND THE

BUSINESS
- Business value should reflect the worth of the cash flows expected
- An in-depth understanding of the business is necessary
- Research and analysis is needed
o The ultimate objective is to assess the risks that the company
may be exposed to, its current position in the industry and its
future prospects.
- Probably the most important part of the process.

STEP 3: DETERMINE THE INFORMATION REQUIREMENTS,

AVAILABILITY, AND QUALITY
- Good valuation should incorporate all available quality information.
o Ex: If mababa bid price mo, baka mababa yung quality of work
na ibigay mo.
- Ascertain the information required for the valuation engagement and
find out whether the information is available (internal or external).
o Dealings with the different authoritative bodies such as the
Assessor’s office and the SEC to gather information.
- The quality, reliability, and completeness of the information is also
important.

STEP 4: SELECT THE VALUATION APPROACH AND METHODOLOGY

- Market Approach/Relative Valuation Method
o It is predicted on the concept that the value of the business is
measured via a comparison of the features of the subject of
valuation with those reasonably comparable businesses.
o Sufficient similarity of qualitative and quantitative characteristics
 Business activities, market of operations, size, capital
structure, profit trends, growth prospects, etc.
 Business activities – Kung ang topic is kunwari hotels
and technological companies.
 Is it within Metro Manila, Asia, or worldwide?
 Is it a big or small company?
 Price to earnings ratio, price to sales ratio, price to book
ratio.
 Common ratios to be applied.
- Income Approach/Absolute Valuation Method
 o Focuses on the cash flow generating capability of the company.
o Value of a company can be measured by the present worth of the
net economic benefit to be received over the lifetime of the
company
o Convert these cash flows to present value through the process of
‘discounting’ (Net Present Value Method)
 Net Present Value = Present Value of the Cash Inflow
(Cash Inflow OR Residual Value x Present Value Factor) –
Cost of Investment
 For you to accept the project, it must be positive.
- Asset-based Approach
o Values the individual assets and liabilities of a company and
aggregates them to arrive at a value.
o It views the value of a company as the excess of assets over
liabilities in adjusted value terms.
 Market value of assets versus market value of liabilities
 Premise is the company is operating as a going concern
 Tends to be used for asset intensive businesses
 Examples include investment holdings and real estate
companies.
- How do we decide on the approach?
o Generally, the factors that influence the choice are:
 Purpose of the valuation exercise
 Availability of the required quality information
 Characteristics of the subject valuation
o Will depend on the strengths, weaknesses, and suitability of each
approach

STEP 5: DETERMINE THE RELEVANT VALUATION PARAMETERS AND

RESULTS
- After determining the appropriate valuation approach to use, detailed
research is done to determine, collect, and/or estimate the required
valuation parameters
- Valuers then collate the data and assess the value of the business.

STEP 6: CARRY OUT SENSITIVITY ANALYSIS AND VALUATION

CROSSCHECKS
- Sensitivity analysis is performed to assess the impact on valuation
arising from changes to assumptions
- It is important to identify key drivers of value as small changes can
result to material impact on business value
- The valuer needs to review the value range determined by performing
a valuation crosscheck to the greatest extent possible
 - The value determined using the primary valuation approach should be
compared to the equivalent value obtained using other valuation
approaches.
- The valuation result will be communicated to the user in the form of a
valuation report, which will:
o Define the objective and scope of the engagement
o Document all relevant information obtained in the valuation
process
 The valuation approach used and the basis of selection.
 The valuation results and the risk and sensitivity analysis.

MODULE 1 – UNDERSTANDING VALUE

EFFICIENT MARKET HYPOTHESIS

DIFFERENCE BETWEEN VALUE AND PRICE

- Value
o Definition: It refers to the worth or usefulness of a good or
service. It is subjective and can vary from person to person
based on their needs, preferences, and circumstances.
 It refers to the worth or usefulness of a good/service.
 It is subjective. Different investors can have their own
perceptions in terms of the value of the asset.
o Nature: involves qualitative aspects, such as emotional
attachment, perceived benefits, and utility. It can be influenced
by factors like brand reputation and personal experiences.
 Qualitative aspect
o Market Influence: can remain constant or fluctuate based on
individual perception and market trends but is not directly tied to
market conditions.
- Price
o Definition: It is the amount of money that is charged for a good
or service. It is an objective measure set by sellers in the market.
 Objective measure
 The one we see as the price in the market.
o Nature: a quantitative measure that is determined by market
forces, including supply and demand, competition, and
production costs.
 A quantitative measure determined by supply and demand.
o Market Influence: changes frequently based on market dynamics,
promotions and economic conditions.
- Example
o A piece of art may have a high value to an individual who
appreciates it, but its price might be lower if not many people are
interested in buying it.
DOES PRICE CAPTURE THE TRUE VALUE OF AN ASSET?
- The value of an asset is the present value of all future cash flows it is
expected to generate.
- For the investor to determine value, all relevant information should be
made known to him/her.
- Otherwise, the agreed price among investors will not reflect the true
value.

EFFICIENT MARKET HYPOTHESIS (EMH)

- Is a financial theory that asserts that prices reflect all available
information at any given time.
o When we say all available information, we might as well say that
this are public information (e.g., nakikita sa news, media) as well
as private information (e.g., information within a certain
company)
- This hypothesis has significant implications for investors, market
behaviour, and the overall functioning of financial markets.

WHAT IS MARKET EFFICIENCY?

- The extent to which the market prices reflect all relevant available
information at any given time.
o Ex: Stock prices
- In markets that are efficient, traders cannot profit from over-or-under-
valuation of stocks as these are traded at price equals value.

THE THREE FORMS OF MARKET EFFICIENCY

- Weak form efficiency
o Will rely sa available na information. All information should be
made available para masabi na there is an efficient market.
o Suggests that all past trading information is reflected in stock
prices.
 Past information is the available information to the investor
– historical yung information, nakalabas na sa public.
o Stock prices should appear to move in random walk.
 Theory of Random Walk – stock prices are random.
Changes in asset prices are random. This means that stock
prices move unpredictably. Kahit mahuhusay sa stock, we
cannot actually predict the price.
 The movement of the stock does not have any pattern –
unpredictable.
o This means that technical analysis cannot consistently yield
profits since historical price movements are already accounted
for in current prices.
o If true, technical analysis will not work.
  Kaya tinawag na weak. Only past information is available.
o The weak form suggests today’s stock prices reflect all the data
of past prices and that no form of technical analysis can aid
investors.
- Semi-strong form efficiency
o Asserts that all publicly available information (including FS, news
releases, and economic indicators – past and present) is reflected
in stock prices.
 It is only the public information, both past and present,
unlike sa weak, past lang.
 News releases – if you are interested in stock, you read the
business pages of the newspapers.
o Public information cannot be studied to beat the market.
 You already have the public information available to
everyone.
o Stock prices should appear to react quickly during news breaks.
 Once investors hear something, the market also reacts.
o This implies that fundamental analysis cannot consistently
provide an advantage.
 Because everybody knows it
o The semi-strong form submits that because public information
is part of a stock’s current price, investors cannot utilize either
technical or fundamental analysis, though information not
available to the public can help investors.
- Strong form efficiency
o Claims that all information, both public and private (insider
information), is reflected in stock prices.
 Both public and private information.
 Insider information – comes from the people inside the
particular company.
o All information, even private ones, cannot be studied to beat the
market.
o Insider trading – buying and selling of a publicly-listed
company’s stock by someone “inside” the company.
Theoretically, it should not happen.
o Impossible in the real world as there will always be directors or
managers who have the edge in gaining information about the
company, and hence the potential for insider trading.
 Meron at meron yan gagawa.
o Under this form, even insider trading cannot lead to consistent
excess returns.
o The strong form version states that all information, public and
not public, is completely accounted for in current stock prices,
and no information can give an investor an advantage in the
market.
IMPLICATIONS FOR INVESTORS
- Passive Investing: if markets are efficient, active trading strategies
(trying to outperform the market) are unlikely to succeed. Therefore,
passive investing strategies, such as index funds, become more
appealing.
o Are we going to buy or purchase the stock?
- Market Timing: the inability to predict future price movements based
on past data or public information suggests that timing the market is a
futile exercise.
o There’s no such thing as timing in the market.

CRITIQUES OF EMH
- Behavioral Finance: critiques argue that psychological factors and
irrational behavior among investors can lead to market anomalies that
contradict EMH. For example, investors may overreact or underreact to
news, leading to price inefficiencies.
o Qualitative factor
- Market Bubbles and Crashes: Historical events such as the 2008
financial crisis, challenge the idea that markets always reflect true
value, as prices can deviate significantly from intrinsic value during
periods of speculation and panic.
o Interest rates are high, maraming nagbagsakan na business.

REAL-WORLD EVIDENCE
- Empirical studies have shown mixed results regarding EMH. While
some markets exhibit characteristics of efficiency, others display
patterns that suggest inefficiencies, such as the tendency for certain
stocks to outperform over time or otherwise.

CONCLUSION
- The EMH provides a foundational understanding of how financial
markets operate under the assumption of rational behavior and
information efficiency. However, the ongoing debates and critiques
highlight the complexity of market dynamics and the role of investor
psychology. As a result, both EMH and its alternatives continue to be
relevant in discussions about investment strategies and market
behavior.

BETA AND STANDARD DEVIATION

[BALIKAN]

COMMON METRICS USED TO MEASURE RISK

- Beta
- Standard Deviation
BETA
- Is a measure of an investment’s sensitivity to market movements. It
indicates how much the investment’s price is expected to change in
relation to changes in the overall market (usually represented by a
benchmark [BALIKAN]).
- Beta = 1
o The investment’s price moves with the market. If the market
increases by 1%, the investment is also expected to increase by
1%.
o Kung ano yung galaw ni market, susunod. If the market increases
by 1% then the investment is expected to increase as well by
1%.
- Beta > 1
o The investment’s is more volatile than the market. [BALIKAN]
o The investment is more volatile.
- Beta < 1
o The investment is less volatile than the market. A beta of 0.5
indicates that if the market increases by 1%, the investment is
expected to increase by only 0.5%, and if the market decreases
by 1%, the investment may decrease by only 0.5%.
- Negative Beta
o A negative beta indicates that the investment move inversely to
the market. [BALIKAN]

BETA: USE IN PORTFOLIO MANAGEMENT

- Investors use beta to assess the risk of individual securities or
portfolios. A portfolio with high beta may be more suitable for risk-
seeking investors, while a low-beta portfolio may appeal to risk-averse
investors seeking stability.
o Playing safe
o The higher the risk, the higher the return.
o Aggressive, conservative investors.
o High beta, high return. Low beta, low return.

STANDARD DEVIATION
- A statistical measure that quantifies the amount of variation or
dispersion of a set of values. In finance, it measures the volatility of an
investment’s returns.

STANDARD DEVIATION: CALCULATION

- Find the average of the [BALIKAN]
-

STANDARD DEVIATION: USE IN PORTFOLIO MANAGEMENT

 - Standard deviation is used by investors to assess the risk associated
with a particular investment portfolio. It helps in understanding how
much the returns can deviate from the expected return, allowing
investors to make informed decisions based on the risk tolerance.
o The volatility will be tested.
o For risk seeking investors, they prefer a high beta and sd. For
conservative, yung mabababa

STANDARD DEVIATION: CONCLUSION

- Both Beta and Standard Deviation are essential tools for measuring
risk in financial markets. Beta provides insights into how an investment
correlates with market movements, while standard deviation offers a
measure of return volatility. Together, they help investors evaluation
potential risks and make informed investment decisions based on their
individual risk preferences and market conditions.
o Compare your standard deviation and beta with the annual
returns.

EXAMPLES OF BETA USAGE

- Portfolio Construction
o An investor is constructing a portfolio and wants to include a mix
of high-risk and low risk assets. They analyze the beta of various
stocks. For instance, they find that Stock A has a beta of 1.8
(high volatility), while Stock B has a beta of 0.5 (low volatility).
The investor decides to include Stock A for potential high returns
but balances it with Stock B to reduce overall portfolio risk.
 Just to play safe.
- Performance Assessment
o A mutual fund manager reports that their fund has a beta of 1.2.
This indicates that the fund is expected to be 20% more volatile
than the market. If the market rises by 10%, the manager
anticipates that the fund will rise approximately 12%.
Conversely, if the market falls by 10%, the fund may decline by
about 12%. This information helps investors understand the risk-
return profile of the fund relative to the market.
- Risk Management
o An institutional investor assesses the beta of its entire portfolio
to gauge its market risk exposure. If the portfolio's average beta
is significantly above 1, the investor may decide to hedge their
position by using options or future contracts to mitigate potential
losses in a declining market.
 Hedging – the beta is above 1 so the volatility is high, the
risk is high. Tendency of investors just to make sure is
hedging to offset later on whatever losses that they might
incur.
EXAMPLES OF STANDARD DEVIATION USAGE
- Volatility Assessment
o An investor is comparing two mutual funds to determine which
one to invest in. Fund X has an annual return of 8% with a
standard of deviation of 4%, while Fund Y has an annual return of
10% with a standard deviation of 8%. The investor may prefer
fund X due to its lower volatility, as it indicates more consistent
performance overtime.
 X: Annual return = 8%, SD = 4%
Y: Annual Return = 10%, SD 8%
 Decision is X. Investor may prefer it due to its lower
volatility.
- Risk Tolerance Evaluation
o A financial advisor helps a client assess their risks tolerance by
analyzing the standard deviation of various investment options.
The advisor explains that investments with higher standard
deviations are riskier and may not align with the client's
conservative investment strategy, prompting a discussion about
suitable investment choices.
 Papasok ulit yung subjectivity and behavior ni investor. Is
he aggressive or conservative?
- Performance Measurement
o An investment analyst evaluates the performance of a stock over
the past five years and calculates the average return and
standard deviation. If the stock has an average annual return of
12% with a standard deviation of 10%, the analyst can conclude
that the stock has moderate volatility. This information can be
used to compare the stock's risk-adjusted performance against
other investment opportunities.

CONCLUSION
- In real-world scenarios, BETA is primarily used to assess an
investment's market risk and volatility relative to the broader market,
helping investors make informed decisions about portfolio construction
and risk management. STANDARD DEVIATION, on the other hand,
quantifies the overall volatility of an investment's returns, enabling
investors to evaluate risk tolerance and consistency in performance.
Together, these metrics provide valuable insights for both individual
and institutional investors in navigating financial markets.

DISCUSSION ON MARKET RISK [BALIKAN]

-

MARKET RISK AND VOLATILITY

- MARKET RISK
 o refers to the potential for an investor to experience losses due to
factors that affect the overall performance of the financial
markets. This type of risk is inherent in all types of investments
and cannot be eliminated through diversification.
- VOLATILITY
o is a statistical measure of the dispersion of returns for a given
security or market index. It represents how much the price of an
asset fluctuates over time. High volatility means an asset's price
can change dramatically in a short period, indicating higher risk.
 Madaling mawala yung investment for aggressive
investors.

ILLUSTRATION OF MARKET RISK AND VOLATILITY: BETA AND

STANDARD DEVIATION
- Example: Stocks Comparison
o Stock A
 Expected Annual Return: 12%
 Standard Deviation: 8%
 Beta: 1.2
o Stock B
 Expected Annual Return: 10%
 Standard Deviation: 4%
 Beta: 0.8
- Analysis
o Beta Interpretation
 Stock A has a beta of 1.2. This means that if the market
increases by 10%, Stock A is expected to increase by
approximately 12% (which is 1.2 times the market
movement). Conversely, if the market decreases by 10%,
Stock A could decrease by about 12%. This indicates that
Stock A is more volatile than the market.
 Stock B, with a beta of 0.8, suggests that it is less volatile
than the market. If the market increases by 10%, Stock B is
expected to increase by about 8% (which is 0.8 times the
market movement). If the market decreases by 10%, Stock
B may decrease by about 8%.
o Standard Deviation
 Stock A has a Standard Deviation of 8%, which indicates
that the returns of Stock A can vary from the expected
return of 12% by about 8%. This means the actual return
can range from 4% to 20%.
 Stock B, has a Standard Deviation of 4%, indicating that its
returns can vary by 4% from the expected return of 10%.
Thus, the actual return can range from 6% to 14%.
- CONCLUSION of the EXAMPLE:
 o Stock A is expected to provide a higher return but comes with
higher volatility and risk due to its higher beta and standard
deviation. It may appeal to risk-seeking investors looking for
higher returns.
o Stock B offers a more stable investment with lower volatility and
risk, making it suitable for conservative investors who prefer
steadier returns.
- SUMMARY
o This example illustrates how beta and standard deviation can
help investors assess the risk and volatility of different stocks. By
understanding these metrics, investors can make strategic
decisions that align with their risk tolerance and investment
goals.