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Variance and Standard Deviation Quiz

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Questions and Answers

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?

$ 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?

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?

<p>Expected rate of return</p> Signup and view all the answers

What does $P_i$ represent in the variance formula?

<p>Probability of the possible rate of return</p> Signup and view all the answers

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.