Essay on Margin of Safety vs. Return Variation/Beta

Margin of Safety

         This is the main principle of investing in any kind of the project in that case the investor only purchases all the securities when the market prices are lower than the intrinsic value nothing more than that. Means to say that when the market price of any security is just a little bit below than its intrinsic values this difference includes in the margin of safety. Many investors that want to invest in different projects so they have to set the margin of safety according to their requirement. In other words the investors have to buy securities according to the risk management so this will allows the investors to invest with minimal downside risk.

          The margin of safety can be calculated through the use of formula. This can be done by subtracting the break even sales from the budgeted or projected sales (Kimmel, Weygandt and Kieso 2010).

Variance of return

        The variance of return can be defined according to the portfolio theory and that is the measure of the risks that exist by doing investment and the investment in the single asset. This means that as the variance increases so according to that greater will be the squared deviation of return that is from the expected rate of return on the investment. The variance in the investment is directly proportional to the squared of the deviation of return from the expected rate of return. 

           The variance can be calculated through the use of these steps that are given below. In the first step is to find out the mean value that can be done through average and then after this in the next step you need to subtract the mean for each number and then take the squared the subtracted value and then in the last step you just need to take a squared differences (Campbell, Lo and MacKinlay 2012). 

Reference of Margin of Safety vs. Return Variation/Beta

Campbell, John Y., Andrew W. Lo, and A. Craig MacKinlay. 2012. The Econometrics of Financial Markets. Princeton University Press.

Kimmel, Paul D., Jerry J. Weygandt, and Donald E. Kieso. 2010. Accounting: Tools for Business Decision Makers. John Wiley & Sons.