The rate of return on the common stock of Flowers by Flo is expected to be 14% in a boom economy,8% in a normal economy,and only 2% in a recessionary economy. The probabilities of these economic states are 20% for a boom,70% for a normal economy,and 10% for a recession. What is the variance of the returns on the common stock of Flowers by Flo?
A) .001044
B) .001280
C) .001863
D) .002001
E) .002471

Question

Quizplus · Accepted Answer

To find the variance, first calculate the expected return: E(R) = (0.20 * 0.14) + (0.70 * 0.08) + (0.10 * 0.02) = 0.086. Then, calculate the variance: Var(R) = (0.20 * (0.14 - 0.086)^2) + (0.70 * (0.08 - 0.086)^2) + (0.10 * (0.02 - 0.086)^2) = 0.001044.

The Rate of Return on the Common Stock of Flowers