1. Your stock investments return 8%, 12%, and -4% in consecutive years.
• What is the sample standard deviation of the above returns?
• Using the standard deviation and mean that you just calculated, and assuming a normal probability distribution, what is the probability of losing 3% or more?
2. Which of the following is correct?
A. Diversification reduces common and independent risks.
B. Diversification is a way of spreading risk across investments, rather than actually reducing risk.
C. Diversification eliminates risk unique to a particular stock.
D. Diversification is not useful for the average investor.