Standard Deviation: View Point Industries has forecast a rate of return of 20.00% if the economy booms (25.00% probability); a rate of return of 15.00% if the economy in in a growth phase (45.00% probability); a rate of return of 2.50% if the economy in in decline (20.00% probability); and a rate of return of -15.00% if the economy in a depression (10.00% probability). What is View Point's standard deviation of returns?

Question

Quizplus · Accepted Answer

Using the formula for standard deviation of returns:
σ = √(Σ[(Ri-Ravg)^2 x Pi])
Where:
Ri = each possible return
Ravg = the expected return
Pi = the probability of each return

Ravg = (20.00% x 0.25) + (15.00% x 0.45) + (2.50% x 0.20) + (-15.00% x 0.10) = 9.375%

[(20.00% - 9.375%)^2 x 0.25] + [(15.00% - 9.375%)^2 x 0.45] + [(2.50% - 9.375%)^2 x 0.20] + [(-15.00% - 9.375%)^2 x 0.10] = 0.1091

σ = √(0.1091) = 0.1046 or 10.46%

Standard Deviation: View Point Industries Has Forecast a Rate of Return