Assume that a security has equally possible outcomes of yielding 8 percent and 4 percent. The standard deviation of the probability distribution of returns for this security is
A) 6 percent.
B) 4 percent.
C) 3 percent.
D) 2 percent.

Question

Quizplus · Accepted Answer

The standard deviation is calculated as the square root of the variance. The variance is the average of the squared deviations from the mean. Here, the mean return is (8% + 4%) / 2 = 6%. The squared deviations are (8% - 6%)^2 = 4 and (4% - 6%)^2 = 4. The average of these squared deviations is (4 + 4) / 2 = 4. The standard deviation is the square root of 4, which is 2%.

Assume That a Security Has Equally Possible Outcomes of Yielding