Parameters Affecting Stock Returns by Norman J. Brown
Stocks, Indexes, Or Roulette?
When it comes to trading equities, it is believed that to increase returns you need to take on more risk. But is that really true? This statistical study will show you what really affects returns.
Risk is commonly measured by standard deviation. Standard deviation measures the deviation of the daily rate of return on capital (Roc) from the mean and thus is a measure of volatility. As more risk is taken on, the standard deviation (Std) increases. In this article, the data presented focuses on daily returns, so the standard deviation will also be expressed daily, although some of you may prefer longer periods such as monthly or yearly data. (As one resource for this data, Morningstar publishes three-year standard deviations.)
THE DATABASE STUDIED
Using Microsoft Excel spreadsheet software, it is possible to evaluate all the necessary parameters when looking at stock returns. From the 500 stocks listed in the S&P 500 index, I separated out 250 equity stocks and evaluated their returns over 25 years from January 1, 1989 to December 31, 2013. For comparison purposes, I also included the Vanguard 500 Index (VFINX), which reflects the overall S&P 500, and I included gambling using roulette as the vehicle.