If the economy booms, Frank's Welding Supply stock is expected to return 19%. If the economy falls into a recession, the stock's return is projected at 5%. The probability of a boom is 80% while the probability of a recession is 20%. What is the variance of the returns on this stock?

Question

Quizplus · Accepted Answer

The expected return is (0.8 * 19%) + (0.2 * 5%) = 16.2%. The variance is calculated as: 0.8 * (19% - 16.2%)^2 + 0.2 * (5% - 16.2%)^2 = 0.003136.

If the Economy Booms, Frank's Welding Supply Stock Is Expected