We calculate the standard deviation as follows:
|
(1) |
(2) |
(3) |
(4) |
(5) |
|
State |
Probability of State of |
Return Deviation |
Squared |
Product |
|
of Economy |
Economy |
from Expected |
Return |
(2) × (4) |
|
Return |
Deviation |
|||
|
Roten |
||||
|
Bust |
0.4 |
0.3 |
0.09 |
0.036 |
|
Boom |
0.6 |
0.2 |
0.04 |
0.024 |
|
a2 = |
0.06 |
|||
|
Bradley |
||||
|
Bust |
0.4 |
0.12 |
0.0144 |
0.00576 |
|
Boom |
0.6 |
0.08 |
0.0064 |
0.00384 |
|
a2 = |
0.0096 |
Taking square roots, the standard deviations are 24.495 percent and 9.798 percent.