Question

You are looking at a possible investment. The following chart shows: the State of the World, the Rate of Return and the Probability that each occurs. Please complete the chart to determine the expected rate of return and the standard deviation of this investment.

State of the World       Rate of Return     Probability    Exp. Rate of Return   Step 2       Step 3

            (A)                            (B)                     (C)                      (D)                       (E)           (F)

Recession                          -63%                    .08          

Below Avg.                       -11%                    .16          

                                                                                               

Average                             14%                    .51                       

                       

Above Avg.                       29%                    .15                                                            

Boom                                 78%                   .10               

Answer 1

A	B	C	D (C*D)	E	F ( E^2)	G (F*C)
	X	Probablity	Prob*X	Deviation (X-mean)	Dev^2	Dev^2*Probability
Recession	-63	0.08	-5.04	-75.49	5698.7401	455.899208
Below avg	-11	0.16	-1.76	-23.49	551.7801	88.284816
Avg	14	0.51	7.14	1.51	2.2801	1.162851
Above avg	29	0.15	4.35	16.51	272.5801	40.887015
Boom	78	0.1	7.8	65.51	4291.5601	429.15601
Total		1	12.49			1015.3899

Mean of X( %) =	Sum of ( Probability*X)
	12.49
Standard deviation(%) =	Squareroot of sum of { probability*(X-mean)^2}
		Sqaurerootof (1015.3899)
		31.87