In: Finance
Windsor stock has produced returns of 13.8 percent, 11.7 percent, 2.3 percent, -21.4 percent, and 8.9 percent over the past five years, respectively. What is the variance of these returns?C) .020574
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First we will calculate the Arithmetic mean as per below:
Formula for Arithmetic Mean is:
Arithmetic Mean (AM) = Sum of the data / No. of data
Sum of the returns = 13.8 + 11.7 + 2.3 + (-21.4) + (8.9) = 15.3
No. of data = 5
Arithmetic Mean = 15.3 / 5 = 3.06 or 0.0306
Steps for calculating variance are:
First we will calculate the deviation of data from the mean data value as per below:
1st: 0.138 - 0.0306 = 0.1074
2nd : 0.117 - 0.0306 = 0.0864
3rd: 0.023 - 0.0306 = -0.0076
4th: -0.214 - 0.0306 = -0.2446
5th: 0.0809 - 0.0306 = 0.0584
In the next step, we will square the deviations computed above, as per below:
1st: (0.1074)2 = 0.01153476
2nd : (0.0864)2 = 0.00746496
3rd: (-0.0076)2 = 0.00005776
4th: (-0.2446)2 = 0.05982916
5th: (0.0584)2 = 0.00341056
In the next step we will add up the values calculated above:
Sum of squared deviations = 0.01153476 + 0.00746496 + 0.00005776 + 0.05982916 + 0.00341056 = 0.0822972
In the next step we will calculate the variance by the following formula:
Variance = Sum of squared deviations / N- 1
where, N is the no. of data, which is 5 here.
Putting the values in the above equation, we get,
Variance = 0.0822972 / 5-1
Variance = 0.0822972 / 4 = 0.020574