Question

A project has a 0.7 chance of doubling your investment in a year and a 0.3 chance of halving your investment in a year. What is the standard deviation of the rate of return on this investment?

Answer 1

Step-by-step explanation:

Given that 0.7 chance of doubling your investment in a year and a 0.3 chance of halving your investment in a year.

So the expected return is:

r = 0.7*100 + 0.3*-50%

= 70% - 15%

= 55%

• Then the Variance formula is:

`0.7*(1-0.55)^(2) + 0.3*(-0.5 -0.55)^(2)`

=0.14175+0.33075

=0.4725

=47.25%

• The Standard Deviation is the square root of the variance.

`√(0.4725)`

=0.6874

= 68.74%