The rate of return on the common stock of Flowers by Flo is expected to be 13 percent in a boom economy,11 percent in a normal economy,and only 6 percent in a recessionary economy.The probabilities of these economic states are 15 percent for a boom,80 percent for a normal economy,and 5 percent for a recession.What is the variance of the returns on this stock?
A)0.000185
B)0.001580
C)0.001963
D)0.000301
E)0.000471

Question

Quizplus · Accepted Answer

E(r)= (0.15 × 0.13)+ (0.80 × 0.11)+ (0.05 × 0.06)= 0.1105 Var = 0.15(0.13 − 0.1105)² + 0.80(0.11 − 0.1105)² + 0.05(0.06 − 0.1105)² = 0.000185

The Rate of Return on the Common Stock of Flowers