Proability Rate of Return (Quants)

[Lia_0610]

An analyst developed the following probability distribution of the rate of return for a common stock
Scenario Probability Rate of Return
1 0.25 0.08
2 0.50 0.12
3 0.25 0.16
The standard deviation of the rate of return is closest to
A. 0.0200
B. 0.0267
C. 0.0283
D. 0.0400
Answer:C
Expected value=0.12
Variance=0.0008
Standard deviation=0.028
________________________________
Anyone know why the ans is C.

 

[jal1003]

0.25 * 0.08 = 0.02
0.5 * 0.12 - 0.06
0.25 * 0.16 = 0.04
Now add all those three to get the Expected return of the portfolio.
0.02 + 0.06 + 0.04 = 0.12
The variance formula is as follows:
Variance = 0.25 * (0.08-0.12)^2 + 0.5 * (0.12-0.12)^2 + 0.25 * (0.16-0.12)^2
Variance = 0.0004 + 0 + 0.0004
Variance = 0.0008
Standard Deviation = Variance^0.5
Therefore:
Standard Deviation = Variance^0.5 = 0.0008^0.5 = 0.0283
Hope it helps.
Good luck

 

[cfagoal2]

this is really basic stuff, you are behind if you don’t even know this

 

[jal1003]

BTW, why do you have four choices in your question?
The CFAI changed to three choices… fyi

 

[Lia_0610]

Thanks! This was taken off the net from kaplan-financial for CFA 2008 hence they still have it in 4 choices I guess.
My exam is in June 2010.