If the economy booms, RTF AB equity is expected to return 10%.If the economy goes into a recessionary period, then RTF is expected to only return 4%.The probability of a boom is 60% while
The probability of a recession is 40%.What is the variance of the returns on RTF?
A).000200
B).000760
C).000864
D).001594
E).029394

Question

Quizplus · Accepted Answer

Using the formula for variance:

Variance = (Probability of Boom x Return in Boom - Expected Return)^2 + (Probability of Recession x Return in Recession - Expected Return)^2

Variance = (0.6 x 0.1 - 0.04)^2 + (0.4 x 0.04 - 0.04)^2
Variance = (0.056)^2 + (0)^2
Variance = 0.000864

Therefore, the variance of the returns on RTF is 0.000864, which is option C.

If the Economy Booms, RTF AB Equity Is Expected to Return