Question

Jodie purchases a bond today. She has the following expectation on the return of the bond over the next year.

Probability	Bond return
25%	5%
45%	2.5%
30%	-1.5%

The overall expected return for the bond over the next year is 1.925%. Which of the following can be used to calculate the standard deviation of the bond over the next year? (There may be more than one correct answer. You will lose marks by choosing a wrong answer. The minimum mark for the question is zero.)

Answer 1

Calculation for Standard Deviation :

• Cumulative Return = (Probability) * (Return)
• Expected Return = Sum Total of Cumulative Return = 1.925%
• Return Deviation from Expected Return = (Return in Each Scenario - Expected Return)
• Square Return Deviation from Expected Return   = (Return in Each Scenario - Expected Return) ^2
• Cumulative Square Return Deviation from Expected Return = Sum of Square Return Deviation from Expected Return
• Variance = Sum of Square Return Deviation from Expected Return
• Standard Deviation = Sqrt ( Variance)

Standard Deviation = 2.46%