In: Finance
h A stock had returns of 19.06 percent, 22.79 percent, −16.25 percent, 9.47 percent, and 28.54 percent for the past five years. What is the standard deviation of the returns? 22.02% 3.10% 17.62% 31.04% 14.10%
Solution: | |||
Answer is 3rd option 17.62% | |||
The sample standard deviation of annual return (%) = 17.62% | |||
Working Notes: | |||
a | b = a - 12.722% | b^2 | |
Year | Annual total return (%) R | (R-r) | (R-r)^2 |
1 | 19.06 | 6.338 | 40.170244 |
2 | 22.79 | 10.068 | 101.364624 |
3 | -16.25 | -28.972 | 839.376784 |
4 | 9.47 | -3.252 | 10.575504 |
5 | 28.54 | 15.818 | 250.209124 |
Sum of annual return | 63.61 | Sum of (R-r)^2 | 1241.69628 |
Mean (r) = sum of returns / no of returns | |||
Mean (r) = 63.61%/5 | |||
Mean (r) =12.722% | |||
Where n = no of return considered = 5 | |||
standard deviation (s.d.) = Square root of (Sum of (R-r)^2 /(n-1)) | |||
standard deviation (s.d.) = Square root of (1241.69628/(5-1)) | |||
standard deviation (s.d.) = Square root of (1241.69628/4) | |||
standard deviation (s.d.) = Square root of (310.42407) | |||
standard deviation (s.d.) = (310.42407)^(1/2) | |||
standard deviation (s.d.) = 17.61885552 | |||
standard deviation (s.d.) = 17.62% | |||
Please feel free to ask if anything about above solution in comment section of the question. |