Question

An alternative investment analyst estimates the following return distributions for a stock, given the economic forecasts:

Probability                    Rate of Return

0.2                               4%      

0.6                               10%    

0.2 18%

The standard deviation of the expected return is closest to:

A).       4.1%   

B).       5.4%

C).       6.3%

D).       4.8%

E).        None of above

Answer 1

Expected return=Respective return*Respective probability

=(0.2*4)+(0.6*10)+(0.2*18)

=10.4%

probability	Return	probability*(Return-Expected Return)^2
0.2	4	0.2*(4-10.4)^2=8.192
0.6	10	0.6*(10-10.4)^2=0.096
0.2	18	0.2*(18-10.4)^2=11.552
		Total=19.84%

Standard deviation=[Total probability*(Return-Expected Return)^2/Total probability]^(1/2)

=(19.84)^(1/2)

=4.5%(Approx)

Hence the correct option is:

E)None of above