The standard deviation of the rate of returns on this investment is 67.35%.
Given,
A project has a 0. 72 chance of doubling.
Investment in a year - 0. 28 chances
Standard deviation of the rate of return - ?
Probability of 100% return = 0.72
Probability of -50% return = 0.28
Expected return = 0.72 * 100% + 0.28 * (-50%) = 58%
Standard deviation = [tex]\sqrt{0.72*(100-58)^{2} + 0.28 * (-50-58)^{2} }[/tex] = 67.35%
In the market, a stock may produce different returns based on different market conditions. Thus, standard deviation of these returns measures the variability in returns around the mean return. So, higher the standard deviation is, higher will be the risk associated to the stock will be.
Hence, the standard deviation of the rate of returns on this investment is 67.35%.
To learn more about the standard deviation of returns here:
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