Assessing risk on Wall Street by Thomas A. Rorro
We have discussed the Random Walk theory as a philosophy of investing and its technical
implications. This final article in the series presents the framework for spreadsheet implementation of the
concepts presented thus far. Any electronic spreadsheet program can be used.
How can the Random Walk theory be applied to determine the worth of an investment before it is made?
Three indicators are used:
- Probability of a Profit (PP)—the risk to the initial capital investment;
- Expected Profit (EP)—a measure of the expected rate of return; and
- Sigma in the Profit (SP)—a measure of the variability of the expected rate of return.