Assume an asset has a 50 percent probability of yielding 10 percent and an equal probability of yielding 6 percent. The standard deviation for this asset is
A) 10 percent.
B) 8 percent.
C) 6 percent.
D) 2 percent.

Question

Quizplus · Accepted Answer

The standard deviation is calculated using the formula for the standard deviation of a two-outcome asset, which is sqrt[p(1-p)(x1-x2)^2], where p is the probability of one outcome, x1 and x2 are the outcomes, and sqrt is the square root. Here, p=0.5, x1=10%, x2=6%, so the calculation is sqrt[0.5*0.5*(0.10-0.06)^2] = sqrt[0.5*0.5*0.0016] = sqrt[0.0004] = 0.02 or 2%.

Assume an Asset Has a 50 Percent Probability of Yielding