Question

In: Finance

Your investment has a 30% chance of earning a 10% rate of return, a 40% chance of earning a 23% rate of return and a 30% chance of earning -7%. What is the standard deviation on this investment?

Your investment has a 30% chance of earning a 10% rate of return, a 40% chance of earning a 23% rate of return and a 30% chance of earning -7%. What is the standard deviation on this investment? (Put your answers in decimal points instead of percentage)

You calculated that the average return of your portfolio is 7% and the standard deviation is 17%, what is the value at risk (VaR) at 5% for your portfolio?

Expert Solution

Calculation of the standard deviation of the investment

Possible return Probability Possible return *probability =possible outcome

10% .3 (30%) 3%

23% .4 (40%) 9.2%

-7% .3 (30%) -2.1%

Expected return =3%+9.2%-2.1%

=10.1%

Deviation=(possible outcome-expexted return) deviaton square

3%-10.1% = -7.1 -7.1*-7.1 =50.41

9.2%-10.1%= -.9 -.9*-.9 =.81

-7%-2.1%= -9.1 -9.1*-9.1 =82.81

Probability *deviation square

.3*50.41 =151.23

.4*.81 =3.24

.3*82.81 =24.843

=151.23+3.24+24.843

=179.313

standard deviation of the investment =S.d√probability *deviation square

=√ 179.313

=13.39

jeff jeffy answered 2 years ago

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