The stock market in Colombia and in other countries of the world plays a dynamic role in the capital market and in strengthening companies in terms of their financial aspects, especially in the search for cash flows in order to increase capital. of work and its productive capacity; what originates the valuation of the companies.
This is represented in the prices of their shares, and the payment of dividends, which are reflected in the investors themselves, so much so that as shareholders they will see their returns, income or resources grow, as long as said dividends are higher than the interest rates that they are paid in the banking market, and that they will have to give up their "Opportunity Cost" today in order to have highly substantial financial improvements tomorrow.
Variance: P1 (X1 X) 2 + P2 (X2 X) 2 +…. + Pn (Xn-X) 2
| • P1 is the probability of X1 |
| • P2 is the probability of X2 |
| • X is the mean of the distribution |
If the stock is assumed to have a current price of $ 500 and does not pay a dividend, if you buy them today and plan to sell them in a year, remember that prices behave according to the supply and demand market. The historical behaviors of said action will be:
| Probability | (P1) | .10 | .twenty | .40 | .twenty | .10 |
| Quantity | (X1) | 400 | 500 | 600 | 700 | 800 |
EV =.10 (400) +.20 (500) +.40 (600) +.20 (700) +.10 (800) EV = $ 600
VARIANCE:.10 (400-600) 2 +.20 (500- 600) 2 +.40 (600-600) 2 +.20 (700-600) 2 +.10 (800600) 2 = $ 12,000
DS = 12000 ½
The Standard Deviation is the square root of the variance. The higher the Standard Deviation, the more dispersed the price will be. Therefore, this is a measure of risk. How much will the price of this share be?
There is a possibility that the actual value is more than twice the standard deviation away from the Expected Value. The real price will be between: 600 - 220 = $ 380 and 600 + 220 = $ 820
But in addition, the Standard Deviation and the Expected Value = 110/600 = 0.18 must be related, which indicates that it is probable that the price is very close to the Expected Value = $ 600, this is known as the technical coefficient; This method helps us to compare with other investment alternatives.
Markowitz makes it clear that investors are rightly afraid of the risk of placing their monetary units in stocks and even in fixed income papers; the important thing is to diversify and not put all the money in a single asset because there is a risk of losing the entire investment. Therefore, it is concluded that for an investor who has a portfolio in several different assets, his total risk will be more important than that of an asset in said portfolio in particular. When measuring the risk of an asset with respect to its total portfolio, in this case, one should not be satisfied with the standard deviation of the rate of return of said additional asset, but rather the degree of correlation, by which said reforms they are interrelated with those of the total portfolio.
"The correlation measures the degree by which two variables such as the return in two titles move together", takes in numerical values the order of -1.0 to 1.0, as explained below:
* Correlation between A and B = 1.0 Positive
* Correlation A and C == 1.0 Negative
* Correlation B and C = 1.0 Negative
| Economy | Action A | Action B | Action C |
| Boom | $ 70 | $ 60 | $ 40 |
| Normal | $ 60 | $ 50 | $ 30 |
| Recession | $ 50 | $ 40 | $ 20 |
| PORTFOLIO A AND B | |||
| Economy | TO | B | A + B |
| Boom | $ 70 | $ 60 | $ 130 |
| Normal | $ 60 | $ 50 | $ 110 |
| Recession | $ 50 | $ 40 | $ 90 |
| PORTFOLIO A + C | |||
| Economy | TO | B | A + B |
| Boom | $ 70 | $ 40 | $ 110 |
| Normal | $ 60 | $ 50 | $ 110 |
| Recession | $ 50 | $ 60 | $ 110 |
In the previous example you get:
A + C the correlation is 1.0, all the risk is eliminated and the highest degree of diversification is reached, but the important note is that the negative and 0 correlation between the returns of securities does not occur in the economy almost never, the suggestion it is knowing how to diversify securities, especially in those countries with high financial volatility such as Colombia, and that stand out for the narrowness of the capital market; The main challenge is to enter the international stock markets, but with a solid economy, which allows attracting capital and foreign investors, and strengthening the negotiation of new financial derivatives.
Notes:
When one stock rises, the other will rise proportionally, the same would happen in the fall of a price in Shares A and B whose correlation is perfectly positive 1.0
When the prices of the shares move in opposite directions, the correlation will be negative 1.0 in Shares A and C.
If the correlation is 0, there is no definite trend. Correlation will indicate diversification
