A project has a 0.54 chance of doubling your investment in a year and a 0.46 cha

Question

A project has a 0.54 chance of doubling your investment in a year and a 0.46 chance of halving your investment in a year. What is the standard deviation of the rate of return on this investment? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

A project has a 0.54 chance of doubling your investment in a year and a 0.46 chance of halving your investment in a year. What is the standard deviation of the rate of return on this investment? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Explanation / Answer

Suppose you invest $ 1 now.

Expected return = [ .54 * (1 *2 ) ] + [.46 * (1*1/2)]

                       = [.54 * 2 ] + [.46 * 1/2]

                       = 1.08 + .23

                       = 1.31

Standard deviatio = square root of .5589

                          = .7476 or 74.76%

probability (P) Return(x) A = (X -1.31) A^2* P = .54 2 2-1.31 = .69 (.69)^2*.54 .257094 .46 .5 .5-1.31 = - .81 (-.81)^2 *.46 .301806 Total .5589

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