To calculate the standard deviation of returns for each alternative, we will need to know the possible

returns, their probabilities, and the expected rate of return for each alternative. Once we have this
information, we can use the following formula to calculate the standard deviation:

Expected rate of return = ∑(Probability of return x Return)

Standard deviation = √∑(Probability of return x (Return - Expected rate of return)²)

Here's an example of how we can use this formula to calculate the standard deviation of returns for
the two alternatives from the previous question:

Alternative A:

40% chance of a 5% return

30% chance of a 7% return

30% chance of a 10% return

Expected rate of return = 6.6%

Expected rate of return for Alternative A = (0.40 x 0.05) + (0.30 x 0.07) + (0.30 x 0.10) = 0.066 or 6.6%

Using the formula, we get:

Standard deviation for Alternative A = √[(0.40 x (0.05 - 0.066)²) + (0.30 x (0.07 - 0.066)²) + (0.30 x
(0.10 - 0.066)²)] = 0.023 or 2.3%

Alternative B:

20% chance of a 2% return

50% chance of a 4% return

30% chance of a 6% return

Expected rate of return = 4.0%

Expected rate of return for Alternative B = (0.20 x 0.02) + (0.50 x 0.04) + (0.30 x 0.06) = 0.040 or 4.0%

Using the formula, we get:

Standard deviation for Alternative B = √[(0.20 x (0.02 - 0.040)²) + (0.50 x (0.04 - 0.040)²) + (0.30 x
(0.06 - 0.040)²)] = 0.015 or 1.5%

So, the standard deviation of returns for Alternative A is 2.3%, and the standard deviation of returns
for Alternative B is 1.5%.