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E(x) = -0.5(0.3) + 1*(0.7) = 0.55
E(x^2) = (0.3)*(0.5)^2 + (0.7)*(1)^2 = 0.775
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Ok, you can approach it like that if you wish
Your answer is +0.55% of the investment. Mine is x = investment. Answer = 1.55x investment. Same result. I shouldnt talk though since I havent done probability for finance yet so I dont know standard notation....
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V(x) = 0.775 - 0.55 = 0.225
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V(X) = E(X^2) - E(X)^2
You forgot to square your mean
Should be 0.775 - 0.55
^2 =
0.4725
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sqrt(0.225) =~ 47.43%
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sqrt
(0.4725) = 0.68739
so we both get the same answer [img]/images/graemlins/grin.gif[/img]
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Yeah, I was still fiddling with it, so I went back and made the changes in red. Your E(x) is the expected value of the final amount, whereas mine is the expected value of the gain, or what we normally refer to as the EV. Yours is consistent throughout, so it's fine.