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Questions and Answers
What is the formula for variance of returns for an individual investment?
What is the formula for variance of returns for an individual investment?
- $ ext{Variance} = rac{1}{n} imes igg( rac{ ext{Sum of } (R_i - E(R_i))^2 imes P_i}{ ext{Total Sum of } (R_i - E(R_i))^2 imes P_i} igg)$
- $ ext{Variance} = rac{1}{n} imes igg( rac{ ext{Sum of } (R_i - E(R_i))^2}{ ext{Total Sum of } P_i} igg)$
- $ ext{Variance} = rac{1}{n} imes igg( rac{ ext{Sum of } (R_i - E(R_i))^2 imes P_i}{ ext{Total Sum of } P_i} igg)$ (correct)
- $ ext{Variance} = rac{1}{n} imes igg( rac{ ext{Sum of } (R_i - E(R_i))^2}{ ext{Total Sum of } (R_i - E(R_i))^2 imes P_i} igg)$
What is the formula for standard deviation of returns for an individual investment?
What is the formula for standard deviation of returns for an individual investment?
- $ ext{Standard Deviation} = igg( rac{ ext{Sum of } (R_i - E(R_i))^2}{ ext{Total Sum of } P_i} igg)^{0.5}$ (correct)
- $ ext{Standard Deviation} = igg( rac{ ext{Sum of } (R_i - E(R_i))^2}{ ext{Total Sum of } (R_i - E(R_i))^2 imes P_i} igg)^{0.5}$
- $ ext{Standard Deviation} = igg( rac{ ext{Sum of } (R_i - E(R_i))^2 imes P_i}{ ext{Total Sum of } P_i} igg)^{0.5}$
- $ ext{Standard Deviation} = igg( rac{ ext{Sum of } (R_i - E(R_i))^2 imes P_i}{ ext{Total Sum of } (R_i - E(R_i))^2 imes P_i} igg)^{0.5}$
What does $R_i$ represent in the variance formula?
What does $R_i$ represent in the variance formula?
- Expected rate of return
- Total sum of possible rate of return
- Possible rate of return (correct)
- Variance
What does $E(R_i)$ represent in the variance formula?
What does $E(R_i)$ represent in the variance formula?
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What does $P_i$ represent in the variance formula?
What does $P_i$ represent in the variance formula?
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Study Notes
Variance of Returns for an Individual Investment
- The formula for variance of returns for an individual investment is: σ² = Σ[P_i * (R_i - E(R_i))²]
- This formula calculates the variance of returns by summing the product of each possible outcome's probability (P_i) and the squared difference between the outcome (R_i) and the expected return (E(R_i))
Components of Variance Formula
- R_i represents the individual possible outcomes or returns of the investment
- E(R_i) represents the expected return of the investment, which is the mean or average return
- P_i represents the probability of each possible outcome or return occurring
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Description
"Test Your Knowledge of Variance and Standard Deviation in Investment Returns" - Take this quiz to assess your understanding of calculating the variance and standard deviation of returns for individual investments. Explore statistical concepts and determine the risk measure for investments.
