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%) = 13.4%. The variance is calculated using the formula: variance = (probability of boom * (return in boom - expected return)^2) + (probability of recession * (return in recession - expected return)^2). Substituting the values gives variance = (0.8 * (16% - 13.4%)^2) + (0.2 * (3% - 13.4%)^2) = 0.002704.

If the Economy Booms, R&F, Inc