Asked by Brendan Lorenzana on May 28, 2024
Verified
Your investment has a 40% chance of earning a 15% rate of return, a 50% chance of earning a 10% rate of return, and a 10% chance of losing 3%. What is the standard deviation of this investment?
A) 5.14%
B) 7.59%
C) 9.29%
D) 8.43%
Rate of Return
The percentage of profit or loss on an investment over a specific period, expressing the gain or loss relative to the investment's initial cost.
- Calculate and interpret the expected rate of return and standard deviation of an investment.
Verified Answer
AG
Aaron GambinoJun 02, 2024
Final Answer :
A
Explanation :
E(rp) = (.4)(15%) + (.5)(10%) + (.10)(−3%) = 10.7%
σ(rp) = .4(.15 − .107)2 + .5(.10 − .107)2 + .10(−.03 − .107)2
σ(rp) = 5.14%
σ(rp) = .4(.15 − .107)2 + .5(.10 − .107)2 + .10(−.03 − .107)2
σ(rp) = 5.14%
Learning Objectives
- Calculate and interpret the expected rate of return and standard deviation of an investment.
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