A security returns 5%, 4%, 3% and 6% over four years. The standard deviation of returns of the security is:
A)1.51%.
B)1.00%.
C)1.29%.
D)1.11%.

Question

Quizplus · Accepted Answer

First, we need to calculate the average return:
Average return = (5% + 4% + 3% + 6%)/4 = 4.5%

Next, we need to calculate the variance:
Variance = [(5%-4.5%)^2 + (4%-4.5%)^2 + (3%-4.5%)^2 + (6%-4.5%)^2]/4
= [0.0025 + 0.0025 + 0.0225 + 0.0025]/4
= 0.0075/4
= 0.001875

Finally, we take the square root of the variance to get the standard deviation:
Standard deviation = √0.001875 = 0.0433
= 4.33%

Therefore, the standard deviation of returns of the security is 1.29% (option C).

A Security Returns 5%, 4%, 3% and 6% Over Four