Florida Company (FC)and Minnesota Company (MC)are both service companies. Their stock returns for the past three years were as follows: FC: −5 percent, 15 percent, 20 percent; MC: 8 percent, 8 percent, 20 percent.
Calculate the variances of returns for FC and MC. (Ignore the correction for the loss of a degree of freedom set out in the text.)

Question

Quizplus · Accepted Answer

To calculate the variance of returns for both companies, first, find the mean (average) return for each company. For FC: (-5 + 15 + 20) / 3 = 10%. For MC: (8 + 8 + 20) / 3 = 12%. Then, calculate the squared deviations from the mean for each year, sum them, and divide by the number of observations. For FC: [(-5-10)^2 + (15-10)^2 + (20-10)^2] / 3 = [(225) + (25) + (100)] / 3 = 350 / 3 = 116.67. For MC: [(8-12)^2 + (8-12)^2 + (20-12)^2] / 3 = [(16) + (16) + (64)] / 3 = 96 / 3 = 32.

Florida Company (FC)and Minnesota Company (MC)are Both Service Companies