Expected Return Risk Compute the standard deviation of the expected return given these three economic states, their likelihoods, and the potential returns:
A) 6.8%
B) 16.5%
C) 21.5%
D) 46.4%

Question

Expected Return Risk Compute the standard deviation of the expected return given these three economic states, their likelihoods, and the potential returns: 
A) 6.8% 
B) 16.5% 
C) 21.5% 
D) 46.4%

Quizplus · Accepted Answer

To compute the standard deviation of the expected return, we need to first calculate the expected return for all the possible states. 
Expected Return = (State Probability x State Return)
Expected Return for the three states:
= (0.25 x 5%) + (0.5 x 10%) + (0.25 x 20%)
= 10%
Using the formula for standard deviation of a probability distribution, we can calculate the standard deviation of the expected return as:
SD = sqrt[((0.25 x (5% - 10%)^2) + (0.5 x (10% - 10%)^2) + (0.25 x (20% - 10%)^2)]
= 0.165 or 16.5%
Therefore, the best choice is B.

Expected Return Risk Compute the Standard Deviation of the Expected