Notes on Chap. 10- Calculating the Variance and Standard Deviation
Since there are four years of returns, we calculate the variables by dividing .2675 by (4-1)=3:
| Year | (1)
Actual Return |
(2)
Average Return |
(3)
Deviation (1)-(2) |
(4)
Squared Division |
| 1997 | -.20 | .175 | -.375 | .140625 |
| 1998 | .50 | .175 | .325 | .105625 |
| 1999 | .30 | .175 | .125 | .015625 |
| 2000 | .10 | .175 | -.075 | .005625 |
| Totals | .70 | .000 | .267500 |
Supertech Hyperdrive
| Variance | .2675/3 = .0892 | .0529/3 = .0176 |
| Standard Deviation | sq. root of .0892 = .2987 | sq. root of .0176 = .1327 |
| Series | Average Return | Risk Premium | Standard Deviation |
| Large-company stocks | 13.3% | 9.5% | 20.1% |
| Small-company stocks | 17.6 | 13.8% | 33.6 |
| Long-term corporate bonds | 5.9 | 2.1 | 8.7 |
| Long-term government | 5.5 | 1.7 | 9.3 |
| Intermediate-term government | 5.4 | 0.0 | 5.8 |
| U.S. Treasury bills | 3.8 | 3.2 | |
| Inflation | 3.2 | 4.5 |