Financial Risk Manager Part 1

Financial Risk Manager Part 1

Get started today

Ultimate access to all questions.

An analyst gathers monthly data about the returns of a stock for the past five years. If the mean monthly return is 6% and the standard deviation of the series of returns is 1.8%, then what is the standard deviation of the mean over the period?

TTanishq

Explanation:

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
Powered ByGPT-5

Comments

Loading comments...