Question

Consider the probability distribution of the rate of return on Paula Mitch stock: Rate of Return Probability 40% 0.25 15% 0.55 –8% 0.20 Referring to question 8 above, compute the standard deviation of Paula Mitch stock.

Must show work/calculation

Select one: a. 12.95% b. 13.10% c. 16.10% d. 25.90%

Answer 1

c. 16.10%

Step-1:Calculation of expected return
State	Probability	Return
	a	b	c=a*b
One	0.25	40%	10.00%
Two	0.55	15%	8.25%
Three	0.20	-8%	-1.60%
Expected Return			16.65%
Step-2:Calculation of variance of return
State	Probability	Return	Expected Return
	a	b	c	d=((b-c)^2)*a
One	0.25	40%	16.65%	0.0136306
Two	0.55	15%	16.65%	0.0001497
Three	0.20	-8%	16.65%	0.0121525
Variance				0.02593275
Step-3:Calculation of standard deviation
Standard deviation	=	Variance	^ (1/2)
	=	0.02593275	^ (1/2)
	=	16.10%