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

Question

Quizplus · Accepted Answer

To find the variance, calculate the expected return first: (0.20 * 0.14) + (0.70 * 0.08) + (0.10 * 0.02) = 0.086. Then, calculate the variance: 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