Q. Can you explain Dispersion method?
Dispersion method help to assert risk in receiving a return on investment. The greater the potential dispersion, the greater the risk. One of the simplest methods in calculating dispersion is range. The range, however, has limited importance. It is useful when there are small samples it loses its effectiveness when the number of values in a sample increases. The best and most effective method to find out how the data scattered around a frequency distribution is to use the standard deviation method. Variance is the square of standard deviation. Risk is composed of the demand that bring in variations in return of income. The main forces bonds, debentures and stocks. The fluctuations in the interest rates are caused by the changes in the government monetary policy and the changes that occur in the interest rates of treasury bills and the government bonds. The bonds issued by the government and quasi-government are considered to be risk free. If higher interest rates are offered, investor would like to switch his investments from private sector bonds to public sector bonds. If the government to tide .over the deficit in the budget floats a new loan/bond of a higher rate of interest, there would be a definite shift in the funds from low yielding bonds to high yielding bonds and from stocks to bonds. Likewise, if the stock market is in a depressed condition, investors would like to shift their money to the bond market, to have an assured rate of return. The rise or fall in the interest rate affects the cost of borrowing. When the call money market rate changes, it affects the bald rate too.
Interest rates not only affect the security traders but also the corporate bodies who carry their business with borrowed funds. The cost of borrowing would increase and a heavy outflow of profit would take place in the form of interest to the capital borrowed. This would lead to a reduction in earnings per share and a consequent fall in the price of share.