Volatility of Project Formula

Volatility of Project Formula

Volatility of project varies with the length of period. It means longer period project has higher volatility and shorter period has small volatility. Relationship between time and volatility has been explained by the following formula

S.D (Longer period) = S.D (short period of time) √T – measure of volatility

Volatility of Project example

Project has cash inflow of 200,000 annual. Life of project is 5 years. Volatility in cash flow is 30,000. Calculate the cash inflow for 5 year and volatility.

Solution

Cash flow 5 years = 200,000 x 5 years = 1,000,000

Volatility for 5 Years = 30,000 x √5

=30,000 x 2.236

= 67080

Long Term Volatility Formula

Long Term Volatility Formula

Monthly Volatility = 12%

Value of assets = 2,000,000

Calculate annual variation in assets?

Solution

In first place the long term volatility i.e. annual shall be calculated and then that volatility would be applied to calculate the possible variation in asset.

Long Term Volatility annual = Short Term Volatility x√12

= .12x3.464

=41.56%

Asset value variation = 2,000,000 x 41.56%

=831200

Co efficient of Variation Formula

Co efficient of Variation Formula

Co efficient of variation represents the investment risk. Co efficient of variation may be calculated by following formula

Coefficient of variation =            Standard deviation

                                                Expected Value

High coefficient of variance represents high investment risk.

Example

Company                               A                  B

Expected Return                    6%                8%

S.D                                      2%               6%

Solution

Coefficient of variance =            Standard deviation

                                                Expected Value

Company A= 2/6

=.333

Company B= 6/8

=.75

Company B has high coefficient of return, therefore company b carries high investment risk.