Calculate the expected value, the expected return, the variance and the standard deviation of an asset that requires a $1000 investment, but will return $850 half of the time and $1,250 the other half of the time.
What will be an ideal response?
Expected value is = 0.5($850) + 0.5($1,250) = $1,050.
Expected return = $1,050/$1,000 = 0.05 or 5.0%
Variance = 0.5(850 - 1,050)2 + 0.5(1,250- 1 ,050)2 = 40,000 dollars2
Standard deviation = the square root of the variance or in this case = $200
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