Financial Risk Manager Part 1

Explanation

To calculate the standard deviation of the mean (also known as the standard error), we use the formula:

Standard Error (SE) = (Standard Deviation) / √n

Where:

• Standard Deviation = 1.8%
• n = number of observations

Since the analyst has collected monthly data for five years:

• n = 5 years × 12 months/year = 60 observations

Calculation: SE = 1.8% / √60 SE = 1.8% / 7.746 SE = 0.2323% ≈ 0.23%

Key Points:

• The standard error measures the precision of the sample mean as an estimate of the population mean
• As sample size (n) increases, the standard error decreases
• This is a fundamental concept in statistics for understanding sampling variability
• The mean monthly return of 6% is not directly used in this calculation, as we only need the standard deviation and sample size