Question

Terry Dactel is considering the purchase of an asset having the following cash flows (in 000's):CF Prob.5 20%12 30%18 30%20 20%What is the asset’s standard deviation (in 000's)?

Answer 1

Answer: b. $5.4

Step-by-step explanation:

First calculate the Expected return;

Expected cashflow = ∑ (Probability of cashflow * cashflow)

Expected cashflow = (5 * 0.2) + (12*0.3) + (18*0.3) +(20*0.2)

=$14

Standard deviation = √∑ [Probability * (CF - Expected CF)^2]

Standard deviation= √[(0.2*(5 - 14)^2) + (0.3*(12-14)^2) + (0.3*(18-14)^2) + (0.2*(20-14)^2)

Standard deviation = $5.4