# Proability Rate of Return (Quants)

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.

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

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

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

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.