Question

2. The following table shows the one-year return distribution of Startup, Inc. Calculate
    a. The expected return.

    b. The standard deviation of the return

Probability		40%			20%		20%		10%		10%
Return		-100%			-75%		-50%		-25%		1000%

1. Expected (Mean) Return

Expected Return = E[R] = Σ_R PR X R

E[R_{Startup Inc}] = 40% (-100%) + 20% (-75%) + 20% (-50%) + 10% (-25%) + 10% (1000%) = 6.5%

2. The standard deviation of the return

Var(R) = E[(R – E[R]²] = Σ_R PR X (R – E[R])²

SD(R) = √Var(R)

Var(R_{Startup Inc}) = 40% (-100% - 0.065)² + 20% (-75%- 0.065)² + 20% (-50%- 0.065)² + 10% (-25%- 0.065)² + 10% (1000%- 0.065)² =

Just wondering if I ended up calculating the Expected (Mean) Return correctly?

Also, I am stuck regarding the standard deviation of the return. Am I going about this homework problem the right way?

Answer 1