Question

You have the opportunity to purchase a MLB Franchise. The probability distribution of expected returns for the franchise is as follows:

Probability Rate of Return
0.1 –20%
0.2 0%
0.4 7%
0.2 15%
0.1 25%
The expected rate of return for your investment in the MLB Franchise is____Expected rate of return = ∑Piki. The standard deviation is_____.

Answer 1

The expected rate of return is 6.3%.

The standard deviation is of 11.29%.

Explanation:

Expected rate of return

Multiply each rate by its probability. So

`E = 0.1(-20) + 0.2(0) + 0.4(7) + 0.2(15) + 0.1(25) = 6.3`

The expected rate of return is 6.3%.

Standard deviation:

Square root of the difference squared between each value and the mean, multiplied by the probability. So

`S = √(0.1(-20-6.3)^2 + 0.2(0-6.3)^2 + 0.4(7-6.3)^2 + 0.2(15-6.3)^2 + 0.1(25 - 6.3)^2) = 11.29`

The standard deviation is of 11.29%.