Assume a portfolio has the possibility of returning 7%, 8%, 10%, or 12%, with likelihood of 20%, 30%, 25%, and 25%, respectively. The standard deviation for the portfolio is:
A)5.717%.
B)3.510%.
C)1.873%.
D)6.480%.
E)3.842%.

Question

Quizplus · Accepted Answer

To calculate the standard deviation, first find the expected return: (0.07*0.20) + (0.08*0.30) + (0.10*0.25) + (0.12*0.25) = 0.094 or 9.4%. Then, calculate the variance: [(0.07-0.094)^2*0.20] + [(0.08-0.094)^2*0.30] + [(0.10-0.094)^2*0.25] + [(0.12-0.094)^2*0.25] = 0.000351. The standard deviation is the square root of the variance: √0.000351 = 0.01873 or 1.873%.

Assume a Portfolio Has the Possibility of Returning 7%, 8