CFA Practice Question

CFA Practice Question

The following is the return distribution for a stock where the future consists of 3 discrete states.

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
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