An asset has four possible rates of return, all equally likely: 5.6%, 15.3%, 15.8%, and 19.8%. What is the standard deviation of this asset's rate of return?
Return(%) | Deviation form average return (D) | D^2 |
5.6 | -8.53 | 72.68 |
15.3 | 1.18 | 1.38 |
15.8 | 1.68 | 2.81 |
19.8 | 5.68 | 32.21 |
Average Return = Sum of Returns / No. of Returns
= (5.6+15.3+15.8+19.8)/4
= 56.5/4
= 14.125%
Variance = D^2/n
= (72.68+1.38+2.81+32.21)/4
= 109.07/4
= 27.27
Standard Deviation = Variance
= 27.27
= 5.22%
*Deviation form average return = Rate of return - average return
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