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The annual standard deviation of project PV is 400000. VAR= 400000*1.645*5^(0.5)
Could you explain why it multiplies 5^(0.5) ?I do explain this in my free lectures!!!
If the standard deviation for 1 year is S, then the standard deviation for n years is
S x square root of n.So here, the SD for 1 year is 400,000. We want it for 5 years, so the SD for 5 years is
400,000 x (square root of 5).
(Writing something to the power of 0.5 is another way of writing ‘square root’)The reason is that the 5 year variance is equal to 5 times the annual variance, and the variance is the std deviation squared. However, the reason itself is not relevant for the exam – all you need to remember is to multiply the annual SD by the square root of the number of years.
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