The expected rate of return on Delaware Shores,Inc.stock is based on three possible states of the economy.These states are boom,normal,and recession which have probabilities of occurrence of 20 percent,75 percent,and 5 percent,respectively.Which one of the following statements is correct concerning the variance of the returns on this stock?
A)The variance must decrease if the probability of occurrence for a boom increases.
B)The variance will remain constant as long as the sum of the economic probabilities is 100 percent.
C)The variance can be positive, zero, or negative, depending on the expected rate of return assigned to each economic state.
D)The variance must be positive provided that each state of the economy produces a different expected rate of return.
E)The variance is independent of the economic probabilities of occurrence.

Question

Quizplus · Accepted Answer

The variance must be positive provided that each state of the economy produces a different expected rate of return, as variance measures the dispersion of returns around the expected return.

The Expected Rate of Return on Delaware Shores,Inc