Question

The variance of a stock's returns can be calculated as the:

a. square root of the average value of deviations from the mean.
b. average value of squared deviations from the mean.
c. sum of the deviations from the mean.
d.average value of deviations from the mean.

Answer 1

The variance of a stock's returns can be calculated as the average value of squared deviations from the mean.

Step-by-step explanation:

The variance of a stock's returns can be calculated as the average value of squared deviations from the mean.

To calculate the variance, we need to find the deviations of each return from the mean return, square each deviation, then find the average of the squared deviations.

For example, if we have the returns -1%, 2%, and 3%, and the mean return is 1%, the deviations are -2%, 1%, and 2%. Squaring these deviations gives 4%, 1%, and 4%. The average of these squared deviations is (4% + 1% + 4%) / 3 = 3%. Therefore, the variance of the stock's returns is 3%.

Answer 2

The correct option is b.

Step-by-step explanation:

The formula for standard deviation is

`\sigma^2=\frac{\sum {(x-\overline{x})^2}}{n}`

where,
`\overline{x}` is mean of the data and n is number of observation.

The variance of a stock's returns can be calculated by the above formula.

Variance of stock's returns is the average value of squared deviations from the mean.

Therefore the correct option is b.