The Table below presents returns across three states of nature for two assets: Risky and Safe.The standard deviation of Safe is 3.2%.What is the difference between the standard deviation of Risky and Safe? (Risky - Safe)

A) 3.6%
B) 4.6%
C) 5.6%
D) 6.6%
E) 7.6%

Question

The Table below presents returns across three states of nature for two assets: Risky and Safe.The standard deviation of Safe is 3.2%.What is the difference between the standard deviation of Risky and Safe? (Risky - Safe)

A) 3.6% 
B) 4.6% 
C) 5.6% 
D) 6.6% 
E) 7.6%

Quizplus · Accepted Answer

Expected return = E(k) = Pr₁k₁ + Pr₂k₂ + ... + Pr_nk_n Expected return (risky) = 0.2(-5%) + 0.6(+15%) + 0.2(+25%) = 13% Next, use the expected return to calculate the standard deviation: Standard deviation = 11ea7fdb_fc12_628b_a768_17553ea7c4ef_TB2902_11 Standard deviation = 11ea7fdb_fc12_899c_a768_dbe3cb54aa1b_TB2902_11 Standard deviation = 9.8% Difference = 9.8% - 3.2% = 6.6%

The Table Below Presents Returns Across Three States of Nature