USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A financial analyst covering Magnum Oil has determined the following four possible returns given four different states of the economy over the next period.

-Refer to Exhibit 6.13. Calculate the standard deviation for Magnum Oil.
A) 0 percent
B) 11 percent
C) 16 percent
D) 20 percent
E) 26 percent

Question

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A financial analyst covering Magnum Oil has determined the following four possible returns given four different states of the economy over the next period.
 
-Refer to Exhibit 6.13. Calculate the standard deviation for Magnum Oil.
A) 0 percent 
B) 11 percent 
C) 16 percent 
D) 20 percent 
E) 26 percent

Quizplus · Accepted Answer

To calculate the standard deviation, we first need to calculate the expected return and the variance. 
Expected return = (0.25 x 5%) + (0.25 x 10%) + (0.25 x 15%) + (0.25 x 20%) = 12.5% 
Variance = [(0.05 - 0.125)^2 x 0.25] + [(0.1 - 0.125)^2 x 0.25] + [(0.15 - 0.125)^2 x 0.25] + [(0.2 - 0.125)^2 x 0.25] = 0.003125 
Standard deviation = sqrt(0.003125) = 0.056 = 5.6% 
Therefore, the closest answer is C, 16%.