Question

A stock currently is paying 5% return. Calculate the
following investment's expected rate of return and
its standard deviation based on the data below.
DATA
Probability	Return
0.15	-0.05
0.25	0.15
0.2	0.2
0.4	0.25

Answer 1

Expected return = Summantion( Probability * Return)

= 0.15*-0.05 + 0.25*0.15 + 0.2*0.2 + 0.4*0.25

Expected Return = 17.00%

Standard Deviation = SQRT(Summation(Probability *(Return - Exp return)^2))

=SQRT(0.15(-0.05-0.17)^2 + 0.25(0.15-0.17)^2 + 0.2(0.2-0.17)^2 + 0.4(0.25-0.17)^2 )

Standard deviation = 10.05%

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