Financial Risk Manager Part 1
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As an investment analyst, your job is to determine how many companies will announce IPOs out of 50 virtual reality startup companies operating in Palo Alto. The annual IPO rate in high-tech industries in all other states of the U.S. is 7.85%. Using a binomial model, what is the standard deviation of the number of virtual reality company IPOs in Palo Alto?
Explanation:
Explanation
For a binomial distribution, the standard deviation is calculated as:
Standard Deviation = √[n × p × (1 - p)]
Where:
- n = number of trials (companies) = 50
- p = probability of success (IPO rate) = 7.85% = 0.0785
Step 1: Calculate variance Variance = n × p × (1 - p) = 50 × 0.0785 × (1 - 0.0785) = 50 × 0.0785 × 0.9215 = 3.616
Step 2: Calculate standard deviation Standard Deviation = √3.616 = 1.9018 ≈ 1.902
Therefore, the standard deviation of the number of virtual reality company IPOs in Palo Alto is 1.902.