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(20 pts.) Ada Hotel & Resorts’ stock is expected to return 8.5 percent if the economy...

  1. (20 pts.) Ada Hotel & Resorts’ stock is expected to return 8.5 percent if the economy is normal. If the economy falls into a recession, the stock's return is projected at a negative 5.4 percent. If the economy booms, the stock’s return is expected to be 12 percent. The probability of a normal economy is 60 percent while the probability of a recession and boom is 20 percent each. Given this information, what is the expected return and variance of the returns on this stock?

（All calculations must be shown for intermediate calculations）

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Answer #1

Let the returns from the stock be X and Probability be P.

Note - Probability 60% can be written as 0.6

20% can be written as 0.2

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