An investor has purchased a gold stock. It is expected that during a good economy, the stock will provide a 4% return, while in a poor economy the stock will provide an 18% return. The probability of
A good economy is expected to be 40%. Given this information, calculate the standard deviation for
This stock.
A) 14.20%
B) 13.30%
C) 6.86%
D) 11.50%
E) 10.60%

Question

Quizplus · Accepted Answer

To calculate the standard deviation, we need to first calculate the expected return and the variance.

Expected return:
(0.4 x 0.04) + (0.6 x 0.18) = 0.116 or 11.6%

Variance:
[(0.4 x (0.04 - 0.116)^2) + (0.6 x (0.18 - 0.116)^2)] = 0.002396 or 0.2396%

Standard deviation = square root of variance = sqrt(0.002396) = 0.0617 or 6.86%

Therefore, the best choice is C.

An Investor Has Purchased a Gold Stock