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CMA Intermediate · Financial Management and Business Data Analytics · Risk and Return

An analyst in a data-analytics team computes the standard deviation of monthly returns of a mutual fund from 12 observed months only, treating them as a sample. Which divisor should be used in the variance calculation?

The divisor should be 11, that is n minus 1. When the 12 monthly returns are a sample, dividing the sum of squared deviations by n-1 corrects the downward bias. Dividing by 12 is appropriate only when the data represent the whole population.

  1. A12
  2. B11Correct
  3. C13
  4. D6

Explanation

For sample data, variance uses n-1 as divisor (Bessel's correction) to avoid underestimating population variance. With 12 observations, the divisor is 11. Dividing by 12 applies to a full population.

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