If the economy booms, R&F, Inc. stock is expected to return 16%. If the economy goes into a recessionary period, then R&F is expected to only return 3%. The probability of a boom is 80% while the probability of a recession is 20%. What is the variance of the returns on R&F stock?
A) .002704
B) .006183
C) .011492
D) .030081
E) .052000

Question

Quizplus · Accepted Answer

The expected return is calculated as (0.8 * 16%) + (0.2 * 3%) = 13%. The variance is calculated as 0.8 * (16% - 13%)^2 + 0.2 * (3% - 13%)^2 = 0.002704.

If the Economy Booms, R&F, Inc