Question

You have been given this probability distribution for the holding-period return for GM stock:

Stock of the Economy	Probability			HPR
Boom		0.40			30	%
Normal growth		0.40			11	%
Recession		0.20		–	10	%

What is the expected variance for GM stock?

Select one:

a. 200.00%

b. 221.04%

c. 246.37%

d. 14.87%

e. 16.13%

Answer 1

State of Economy	Probability of state of the economy [p]	HPR [%] if the state occurs [r]	E[r] = p*r	d = r-E[r]	d^2	p*d^2
Boom	0.40	30	12.00	$          15.60	243.36	97.34
Normal growth	0.40	11	4.40	$           -3.40	11.56	4.62
Recession	0.20	-10	-2.00	$        -24.40	595.36	119.07
			14.40			221.04
Variance = 221.04%
Answer: [b] 221.04%