Expected return: This is the return that an individual expects a stock to earn over the next period. Of course, because this is only an expectation, the actual return may be either higher or lower. An individual’s expectation may simply be the average return per period a security has earned in the past. Alternatively, it may be based on a detailed analysis of a firm’s prospects, on some computer-based model, or on special

(or inside) information. LO.1 Variance and standard deviation: There are many ways to assess the volatility of a security’s return. One of the most common is variance, which is a measure of the squared deviations of a security’s return from its expected return. Standard deviation is the square root of the variance. LO.1