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NOTEBOOK: Back to finance class — for a lesson on market volatility


It seems like the term “market volatility” gets thrown quite a bit in financial news releases, so I thought it would be interesting to sit in on a Lunch & Learn event last week over at Iowa State University’s downtown classroom in Capital Square. James Brown, associate professor of finance with the Ivy College of Business, provided an interesting briefing that looked at the causes of market volatility. (By now you’re probably thinking: What does this reporter do when he really lets loose?)

A few of what I thought were interesting takeaways (My major in business school, by the way, was finance. But 1984 was a long time ago …):  
From the earliest days of the New York Stock Exchange in the late 1920s through today, the “risk premium,” or added amount that investors expect from the stock market versus parking their money in safe U.S. Treasury Bills, has consistently run at about 6 percent.  

In some sense, Brown said, you could make the case that uncertainty surrounding the economy and the near-term moves of the market are normal, and that if there wasn’t that uncertainty, investors wouldn’t be demanding a risk premium and they wouldn’t have the kind of market gains that they do. 

Looked at another way, the standard deviation of returns for the Standard & Poor’s 500 index is 19.6 percent — so with that much of a range in price swings, why are we surprised to see negative returns sometimes? 

What’s next in the near term for the market? “Who knows?” Brown asked. However, “The very large monthly market volatility suggests there is a lot of fear about what’s going to pop,” he said.

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