SOLUTION: The value of one stock in a particular share is 150 pence. In a simple financial model, it is supposed that the next day, the share price will either decrease by 10%, stay the same

Question 925698: The value of one stock in a particular share is 150 pence. In a simple financial model, it is supposed that the next day, the share price will either decrease by 10%, stay the same, or increase by 5%. Each of these three events are assumed to be equally likely. Calculate the variance of the stock price on the next day. Give your answer correct to 1 decimal place
Answer by Theo(13342) (Show Source): You can put this solution on YOUR website!
the expected value of the stock is 1/3 * 135 + 1/3 * 150 + 1/3 * 157.5
do the calculations and the expected value is 147.5
calculate the variance of that as follows:
sum of squared difference between each data point and the mean is:
135 - 147.5 = -12.5 squared = 156.25 * 1/3 = 52.0833
150 - 147.5 = 2.5 squared = 6.25 * 1/3 = 2.0833
157.5 - 150 = 10 squared = 100 * 1/3 = 33.3333
add them up to get the sum of squares.
sum of squares = 87.4999 which can be rounded to 87.5
that's your variance.

i verified with a statistics calculator that the standard deviation is equal to 9.35414...
square that and you get 87.5
since the variance is the standard deviation squared, the numbers check out and the solution looks good.

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