Question

Your investment has a 20% chance of earning a 30% rate of return, a 50% chance of earning a 10% rate of return, and a 30% chance of losing 6%. What is your standard deviation on this investment?a. 12.8%b. 15.6%c. 15.4%d. 12.5%

Answer 1

Answer:

a: 12.8%

Explanation:

Standard Deviation would be calculated with the probability approach since there is probability given in the question.

• Formula of Standard Deviation and the solution is given in the pictures below.
• Although ERR the required part to calculate Standard Deviation is calculated in the text.

Calculating ERR:

ERR= Sum of Probabilities × Rate of returns.

In our question = ERR= 0.2 × 30% + 0.5 × 10% + 0.3 × (-6%) = 0.128 = 12.8%

Thus, by putting all the values in the formula you will get the answer 12.8%.