Problem Set 2 question

Here’s a brief Q&A that I had last evening with a student about Problem Set 2:

Q: Hi Dr. Garven, I was wondering if I should use =stdev.p or =stdev.s when solving for the standard deviation on Excel. I understand this is a sample so =stdev.s is the formula I presume that I should use but I’m not quite sure. Which should I use?

A: Neither – the “=stdev.p” and “=stdev.s” commands in Excel are useful for calculating the standard deviation of observed realized values of a random variable. In problem set 2, the investor contemplates expectations of future state-contingent returns on securities. Since standard deviation is the square root of the variance, start by calculating variance (see p. 9 of the Statistics Tutorial, Part 1 lecture note).

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