Question
Sun Corporation has had returns of -3%, 12%, 16%, and 23% for the past four years. Calculate the standard deviation of the returns.Hint by professor:
Sun Corporation has had returns of -3%, 12%, 16%, and 23% for the past four years. Calculate the standard deviation of the returns.Hint by professor: For this type of question, the probability of each state is not assigned because they represent three historical data points. The formulas for expected return and variance are as follows (N is the number of observations given)
- Expected return =ER = 1/N *(r1+r2+...+rN);
- Variance = Var = 1/(N-1) *[(r1 - ER)^2 + (r2 - ER)^2 +...+ (rN - ER)^2]
- Standard deviation = SQRT(Var)
The convention is to use an equal weight, 1/N, for the expected return. However, notice the weight of 1/(N-1) used in the variance calculation. This is usually used as a convention to reduce bias for a small sample.
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