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**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.

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**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 |