You have been given the following forecasts for the economy and Stock A: (1)the probability of having a recession next year is 30.0%, a normal economy is 55.0%, and an expansion is 15.0%, and (2)the price of Stock A will be $9 if the economy is in recession, $15 if the economy is normal, and $18 if the economy is in expansion.What is the ex ante variance of Stock A's returns if it is currently selling for $12? A)7.1719%² B)26.7804%² C)29.4219%² D)54.2419%²

Question

Quizplus · Accepted Answer

The expected price of Stock A is calculated as: (0.30 * $9) + (0.55 * $15) + (0.15 * $18) = $13.05. The expected return is (($13.05 - $12) / $12) = 8.75%. The variance is calculated using the formula: Σ [P(i) * (R(i) - E(R))^2], where P(i) is the probability of each state, R(i) is the return in each state, and E(R) is the expected return. Calculating this gives a variance of 7.1719%².

You Have Been Given the Following Forecasts for the Economy