Assume that an investment is forecasted to produce the following returns: a 20% probability of a 12% return; a 50% probability of a 16% return; and a 30% probability of a 19% return.What is the standard deviation of return for this investment?
A) 5.89%
B) 16.1%
C) 2.43%
D) 15.7%

Question

Quizplus · Accepted Answer

To calculate standard deviation, we need to first calculate the expected return. 
- E(R) = (0.20 x 0.12) + (0.50 x 0.16) + (0.30 x 0.19) 
- E(R) = 0.156 or 15.6%
Next, we need to calculate the variance. 
- Var = (0.20 x (0.12 - 0.156)^2) + (0.50 x (0.16 - 0.156)^2) + (0.30 x (0.19 - 0.156)^2) 
- Var = 0.00058336 
Finally, we can calculate standard deviation. 
- SD = SQRT(Var) 
- SD = 0.0243 or 2.43%

Assume That an Investment Is Forecasted to Produce the Following