# 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 donâ€™t even know this

BTW, why do you have four choices in your question? The CFAI changed to three choicesâ€¦ 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.