CFA Practice Question
The following is the return distribution for a stock where the future consists of 3 discrete states.
1 | 0.35 | 4%
2 | 0.25 | 9%
3 | 0.4 | 10%
State | Probability | Return for Stock A
1 | 0.35 | 4%
2 | 0.25 | 9%
3 | 0.4 | 10%
The standard deviation of stock A is:
A. 0.02707
B. 0.0007328
C. 0.003959
Explanation: Calculate mean return of stock A, then subtract from returns. Finally square the deviations and weight by probability.
User Contributed Comments 3
| User | Comment |
|---|---|
| cwest020 | they left off a few steps. After you multiple the squared deviations by the weight, add them up and take the square root. |
| tijean25 | I still can't see that answer. Please add the details |
| akirchner1 | First find the mean: (.04 + .09 + .10) / 3 = 7.666 Then find the weighted average variance: 0.35*(0.0766 - 0.04)^2 + 0.25*(0.0766 - 0.09)^2 + 0.40*(0.0766 - 0.10)^2 = 0.000733 Find the square root of the variance to get the standard deviation sqrt(0.000733) = 0.02707 |