The formula for the standard deviation of cash held by the centralized depository for N affiliates is

Question

Quizplus · Accepted Answer

The formula for standard deviation assumes that the interaffiliate cash flows have a correlation coefficient of 0. This means that there is no linear relationship between the cash flows of the affiliates, which is the standard assumption made in finance when estimating standard deviation. If the correlation coefficient is -1 or +1, it suggests that the cash flows of the affiliates are perfectly negatively or positively correlated respectively, which is not a realistic assumption.

The Formula for the Standard Deviation of Cash Held by the Centralized