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Stocks Risk vs. Return Each category of stocks has its own degree of risk and return. Value stocks: Tend to fluctuate less than growth stocks Represent companies that are out of favor or have lower "price-earnings ratios" Growth stocks: Tend to fluctuate much more than value stocks. Represent companies that are growing rapidly, and today's stock price is based on the expectation and potential of that company.   Quick Question What is a P/E ratio, and why is it even important? A. To get the Price Earnings, or P/E Ratio, divide the stock's price by earnings for the latest two quarters. It is an important indicator of potential value of a stock. B. To get the Price Earnings, or P/E Ratio, divide the stock's price by earnings for the latest four quarters. It is an important indicator of investor sentiment and the value of a stock. C. To get the Price Earnings, or P/E Ratio, add the stock's price by earnings for the latest four quarters. It is an important indicator of investor sentiment and the value of a stock. D. To get the Price Earnings, or P/E Ratio, add the stock's price by earnings for the latest two quarters. It is an important indicator of investor sentiment and the value of a stock. Small companies: Are usually a riskier investment Tend to have a higher standard deviation than larger companies because their size makes them more reactive to changes in the marketplace Large companies: Are less risky than small companies because their size makes them more stable Tend to have a lower standard deviation since they are better able to weather economic changes   Quick Question Stephen buys a stock with a historical return of 8%, with standard deviation of 12.5%. What does that mean? A. The standard deviation indicates how much the stock has not fluctuated over time. An annual return of 8% with a standard deviation of 12.5% means that, almost 67% of the time, that stock has averaged 8% per year, plus or minus 12.5%. In one year it may have been plus 20.5%; the next year, negative 4.5%. It is a measurement of stock volatility. B. The standard deviation indicates how investing in the small companies is advisable because they are more stable. C. The investment style box indicates how much the stock has fluctuated over time. An annual return of 8% with a standard deviation of 12.5% means that, almost 67% of the time, that stock has averaged 8% per year, plus or minus 12.5%. In one year it may have been plus 20.5%; the next year, negative 4.5%. It is a measurement of stock volatility. D. The standard deviation indicates how much the stock has fluctuated over time. An annual return of 8% with a standard deviation of 12.5% means that, almost 67% of the time, that stock has averaged 8% per year, plus or minus 12.5%. In one year it may have been plus 20.5%; the next year, negative 4.5%. It is a measurement of stock volatility. < PREVIOUS NEXT > #38599