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Dispersion of points around the mean of a distribution

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Reference no: EM131190019

You agree with calculation of the SD as shown below?

Variance measures the dispersion of points around the mean of a distribution. In this context, we are attempting to characterize the variability of possible future security returns around the expected return. In other words, we are trying to quantify risk and return. Variance measures the total risk of the possible returns.

State of Economy

Probability

Return (%)

Squared Deviation

Product (Dev*Prob)

+1% change in GDP

.25

-5

400

100

+2% change in GDP

.50

15

0

0

+3% change in GDP

.25

35

400

100

Total

1.00

E(R) = 15

 

s2 = 200

Standard deviation = square root of variance = 14.14%

Reference no: EM131190019

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