we calculate the standard deviation as follows 557641

We calculate the standard deviation as follows:

(1)

(2)

(3)

(4)

(5)

State

Probability of State of

Return Deviation

Squared

Product

of Economy

Economy

from Expected

Return

(2) × (4)

Return

Deviation

Roten

Bust

0.4

0.3

0.09

0.036

Boom

0.6

0.2

0.04

0.024

a2 =

0.06

Bradley

Bust

0.4

0.12

0.0144

0.00576

Boom

0.6

0.08

0.0064

0.00384

a2 =

0.0096

Taking square roots, the standard deviations are 24.495 percent and 9.798 percent.

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